1. finance
2. accounting and auditing

COVER SHEET
P
W -
9
4
S.E.C. Registration Number
P A
L
H
O
L
D
I
N
G
S
,
I
N
C
.
(Company’s Full Name)
7
T
H
6
7
5
F
L
O
O
R
A
L
L
I
E
D
B
A
N
K
A
Y
A L A
A V E
.
M A
(Business Address: No. Street City / Town / Province)
K
A
C
E
N
T
E
R
C
I
T
Y
.
4
SUSAN LEE
Contact Persons
0
3
3
T
I
817-8710
Company Telephone Number
1
1
7
-
Q
Month
Day
Fiscal Year
Month
Day
Annual Meeting
Secondary License Type, If Applicable
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
-----------------------------------------------------------------------------------------------------------------------------To be accomplished by SEC Personnel concerned
File Number
Document I.D.
STAMPS
Remarks = pls. use black ink for scanning purposes
LCU
Cashier
Foreign
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO
SECTION 17 OF THE SECURITIES REGULATION CODE
September 30, 2011
1.
For the quarter period ended
2.
SEC Identification Number PW- 94
4.
its
Exact name of registration as specified in
charter
5.
3. BIR Tax Identification No. 430-000-707-922
Metro Manila,
Philippines
(Province, country or other jurisdiction of
incorporation or organization)
PAL HOLDINGS, INC.
6
( SEC Use Only)
Industry Classification Code:
7.
7/F Allied Bank Center, 6754 Ayala Avenue, Makati City
Address of principal office including postal code
1200
Postal Code
8.
632 – 817-8710
Registrant’s telephone number, including area code
9.
Not Applicable
Former name, former address, former fiscal year, if changed since last report
10.
Securities registered pursuant to Section 8 and 12 of the SRC
Title of Each Class
Number of Shares of Common Stock
Outstanding and Amount of Debt Outstanding
Common Stock
5,421,512,096
11. Are any or all of these securities listed on the Philippine Stock Exchange?
Yes [ X ]
12.
No [
]
Check whether the registrant:
(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17
thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26
and 141 of the Corporation Code of the Philippines, during the preceding twelve (12)
months (or for such shorter period the registrant was required to file such reports)
Yes [ / ]
No [
]
(b) has been subject to such filing requirements for the past 90 days.
Yes [ / ]
No [ ]
Annex “A”
PAL HOLDINGS, INC.
AND SUBSIDIARIES
Quarterly Consolidated Financial Statements
For the Six Months Ended September 30, 2011
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in Thousands)
30-Sep-11
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents & available-for-sale investments
Receivables - net
Expendable parts, fuel, materials and supplies
Other current assets
Total Current Assets
Noncurrent Assets
Property, plant and equipment -net
Deposits on aircraft leases
Deferred tax assets
Available-for-sale-investments
Investment properties
Other noncurrent assets
Total Noncurrent Assets
TOTAL ASSETS
P
P
3,182,069
6,107,201
1,685,079
1,755,684
12,730,033
50,611,102
3,347,514
833,451
533,483
813,654
5,019,190
61,158,394
73,888,427
31-Mar-11
(Audited)
P
P
LIABILITIES AND EQUITY
Current Liabilities
Notes payable
5,956,664 P
P
Current portion of long-term obligations
3,865,700
5,293,202
Accounts payable
12,813,047
Accrued liabilities
10,000
Due to related parties
6,216,874
Unearned transportatin revenue
34,155,487
Total Current Liabilities
Noncurrent Liabilities
23,903,304
Long-term obligations - net of current portion
5,732,107
Accrued employee benefits
6,889,933
Reserves and other noncurrent liabilities
36,525,344
Total Noncurrent Liabilities
70,680,831
TOTAL LIABILITIES
Equity
5,421,568
Capital stock - P 1 par value Authorized and issued
Capital in excess of par
17,998,373
Other components of equity:
(4,666,860)
Cumulative translation adjustment - net of related deferred tax
76,331
Net changes in fair value of AFS investments-net of related deferred tax
297,549
Revaluation increment - net of related deferred tax
(16,395,455)
Deficit
(56)
Treasury Stock
2,731,450
Minority interest
476,146
3,207,596
Total Equity
TOTAL LIABILITIES AND EQUITY
P
73,888,427 P
4,540,579
5,370,915
1,771,915
1,719,773
13,403,182
49,983,183
3,215,361
826,011
560,974
806,390
3,770,289
59,162,208
72,565,390
5,591,428
7,013,431
5,508,269
12,046,328
10,000
6,819,136
36,988,592
20,996,623
5,312,184
3,890,963
30,199,770
67,188,362
5,421,568
17,998,373
(4,671,132)
106,323
331,183
(14,613,528)
(56)
4,572,731
804,297
5,377,028
72,565,390
Note:
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
FOR THE THREE (3) MONTHS ENDED
30-Sep-11
30-Sep-10
REVENUE
Passenger
Cargo
Interest income
Others
EXPENSES
Flying Operations
Maintenance
Aircraft and traffic servicing
Financing charges
Passenger service
Reservation and sales
General and administrative
Others
NET INCOME (LOSS)
OTHER COMPREHENSIVE INCOME/(LOSS)
Net changes in fair value of available-for-sale
investments , net of DIT
Net changes in fair value of derivative assets
Effect of foreign exchange translation
TOTAL COMPREHENSIVE INCOME (LOSS)
P
15,224,948
1,326,286
62,880
1,338,972
17,953,086
P
11,413,593 P
1,892,271
2,380,786
283,587
1,213,639
1,267,749
646,153
545,810
19,643,588
(1,690,502)
P
(14,107) P
10,318
(3,789)
(1,694,291) P
P
P
15,149,730
1,532,684
60,189
1,454,440
18,197,043
Note:
FOR THE SIX (6) MONTHS ENDED
30-Sep-11
30-Sep-10
P
32,101,868
3,055,404
102,252
2,441,335
37,700,859
9,637,189 P
1,886,786
2,338,382
331,421
1,214,822
1,106,554
679,848
(216,898)
16,978,104
1,218,939
23,760,757 P
3,681,703
4,860,186
667,417
2,477,306
2,406,559
1,251,018
634,110
39,739,056
(2,144,473)
19,915,390
4,287,870
4,668,332
923,803
2,463,397
2,200,032
1,355,621
(930,328)
34,884,117
2,816,742
452 P
15,840
(236,047)
(219,755)
999,184 P
(30,005) P
5,046
(24,959)
(2,169,432) P
409
(143,292)
(160,650)
(303,533)
2,513,209
P
31,902,635
2,769,466
120,094
2,802,388
37,594,583
Net income (loss) attributable to:
Equity Holders of the Parent
P
(1,431,763) P
1,032,062 P
(1,815,561) P
P
(258,739) P
186,877 P
(328,912) P
Non-controlling Interest
Total comprehensive income (loss) attributable to:
Equity Holders of the Parent
P
(1,437,130) P
845,998 P
(1,841,280) P
P
(257,161) P
153,186 P
(328,152) P
Non-controlling Interest
EARNINGS (LOSS) PER SHARE
P
(0.26) P
0.19 P
(0.33) P
Computed based on net income (loss)
P
(0.27) P
0.16 P
(0.34) P
Computed based on total comprehensive income (loss)
Earnings per share is determined by dividing net income/total comprehensive income by the number of shares outstanding
Computed based on net income (loss)
9/30/2011 three months = (P 1,431,763) / 5,421,512
9/30/2010 three months = P 1,032,062 / 5,421,512
9/30/2011 six months = (P 1,815,561) / 5,421,512
9/30/2010 six months = P 2,385,038 / 5,421,512
Computed based on total comprehensive loss
9/30/2011 three months = (P 1,437,130) / 5,421,512
9/30/2010 three months = P 845,998 / 5,421,512
9/30/2011 six months = (P 1,841,280) / 5,421,512
9/30/2010 six months = P 2,130,468 / 5,421,512
2,385,038
431,704
2,130,468
382,741
0.44
0.39
PAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)
Additional
Paid-in
Capital
Capital
Stock
BALANCES AT MARCH 31, 2009,
Adjustment in capital stock issued
Net income for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
Net effect of transfer of portion of
revaluation increment in property
realized through depreciation. net of
deferred income tax and foreign
exchange adjustment
BALANCES AT MARCH 31, 2010
Net income for the year
Other comprehensive loss
Total comprehensive loss for the year
Net effect of transfer of portion of
revaluation increment in property
realized through depreciation - net of
deferred income tax , foreign exchange
adjustment and other changes
Net effect of transfer of portion of
revaluation increment in property
realized through disposal - net of
deferred income tax , foreign exchange
adjustment and other changes
Total transfer
Conversion of advances from parent company to equity
BALANCES AT SEPTEMBER 30, 2010
Cumulative
Translation
Adjustment
5,421,568
17,517,282
-
-
5,421,568
-
17,517,282
-
5,421,568
Other Components of Equity
Net Changes
in Fair
Values of
AvailableRevaluation
for-Sale
Increment in
Investments
Property
481,090
17,998,372
Sub-total
(3,510,310)
-
125,143
-
1,497,302
-
(832,456)
(832,456)
(58,704)
(58,704)
-
(4,342,766)
66,439
(188,143)
1,309,159
(270,757)
(270,757)
16,187
16,187
(Deficit)
21,050,985
(891,160)
(891,160)
(18,940,970)
157,743
188,143
(18,595,084)
2,385,038
-
(188,143)
19,971,682
(254,570)
(254,570)
(37,314)
-
-
(202,075)
(239,389)
(4,613,523)
82,626
1,069,770
Treasury
Stock
Total Equity
Attributable
to Equity
Holders of
the Parent
Noncontrolling
Interest
Total
(56)
2,109,959
157,743
(891,160)
(733,417)
448,458
52
29,498
(158,973)
(129,475)
2,558,417
52
187,241
(1,050,133)
(862,892)
(56)
2,385,038
1,376,542
2,385,038
(254,570)
2,130,468
319,035
431,704
(48,963)
382,741
1,695,577
2,816,742
(303,533)
2,513,209
(37,314)
37,314
-
-
-
(202,075)
(239,389)
481,090
19,958,813
288,679
325,993
-
15,043
15,043
(15,884,053)
(56)
86,604
86,604
481,090
4,074,704
101,647
101,647
481,090
4,791,523
157,743
716,819
PAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands)
Capital
Stock
BALANCES AT MARCH 31, 2010
Net income for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
Reclassification of revaluation increment
deemed cost
Conversion of amounts due to related parties
into additional paid-in capital
Net effect of transfer of portion of
revaluation increment in property
realized through depreciation. net of
deferred income tax and foreign exchange
adjustment
BALANCES AT MARCH 31, 2011
Net income for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
Net effect of transfer of portion of
revaluation increment in property
realized through depreciation. net of
deferred income tax and foreign exchange
adjustment
BALANCES AT SEPTEMBER 30, 2011
5,421,568
Additional
Paid-in
Capital
17,517,283
Cumulative
Translation
Adjustment
Other Components of Equity
Net Changes
in Fair
Values of
AvailableRevaluation
for-Sale
Increment in
Investments
Property
Sub-total
(4,342,769)
66,440
1,309,159
(328,363)
(328,363)
39,883
39,883
(Deficit)
Total Equity
Attributable
to Equity
Holders of
the Parent
Treasury
Stock
(18,595,127)
2,533,394
(56)
383,624
383,624
(2,967,170)
95,144
95,144
2,533,394
-
(1,120,877)
(1,120,877)
1,120,877
481,090
-
5,421,568
-
17,998,373
-
(4,671,132)
106,323
(240,723)
331,183
327,328
(14,613,528)
(1,815,561)
-
(240,723)
(4,233,626)
(25,720)
(25,720)
4,272
4,272
(29,992)
(29,992)
5,421,568
17,998,373
(4,666,860)
76,331
(33,634)
297,549
(33,634)
(4,292,980)
33,634
(16,395,455)
(56)
(1,815,561)
(56)
Noncontrolling
Interest
1,376,498
2,533,394
95,144
2,628,538
319,034
459,524
10,057
469,581
Total
1,695,532
2,992,918
105,201
3,098,119
-
-
481,090
481,090
86,605
4,572,731
(1,815,561)
(25,720)
(1,841,281)
15,682
804,297
(328,912)
761
(328,151)
102,287
5,377,028
(2,144,473)
(24,959)
(2,169,432)
2,731,450
476,146
3,207,596
PAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
FOR THE SIX (6) MONTHS ENDED
30-Sep-11
30-Sep-10
CASH FLOWS FROM OPERATING ACTIVITIES
P (2,144,473) P
Net Income (Loss)
Adjustments for:
3,206,329
Depreciation
Provision for doubtful accounts, retirement benefits,
121,753
contingencies and others-net
424,784
Effect of remeasurement of derivative financial instruments
(32)
Interest income
(105,416)
Dividend income
1,502,945
Operating income (loss) before working capital changes
Decrease (increase) in:
(645,685)
Receivables
102,796
Expendable parts, fuel, materials and supplies
(156,303)
Other current assets
Increase (decrease) in:
(1,418,462)
Accounts payable and accrued liabilities
Due to related parties
(663,686)
Unearned transportation revenue
Net increase in accrued employee benefits
583,403
and other noncurrent liabilities
280,062
Others
Net cash generated from operations
(414,930)
Interest received
32
Net cash provided by (used in) operating activities
(414,898)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment - net
(854,212)
Proceeds from disposal of property and equipment
Dividend received
105,416
Predelivery payment to Boeing B777 aircraft
(2,462,861)
Advance payments for A320 simulator and B777 spare engine
(258,458)
Proceeds from cancellation or predelivery payments
Net changes in other noncurrent assets
(690,141)
Net cash used in investing activities
(4,160,256)
CASH FLOWS FROM FINANCING ACTIVITIES
Availments of:
919,779
Notes payable
1,313,970
Advances from affiliates
Payments of :
Notes payable
(1,113,677)
Long-term obligations
Advances from related parties
Net advances from sale of future receivables
2,068,276
3,188,348
Net cash used in financing activities
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
28,296
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(1,358,510)
4,540,579
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
3,182,069 P
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD P
2,816,742
3,504,487
249,500
(305,971)
(16)
(187,774)
6,076,968
(549,979)
(22,400)
(319,066)
(344,047)
(4)
281,973
458,228
(309,691)
5,271,982
16
5,271,998
1,792,329
187,774
(581,207)
320,755
(326,201)
1,393,450
(269,543)
(4,724,363)
(878,420)
(5,872,326)
(126,555)
666,567
3,397,022
4,063,589
PAL HOLDINGS, INC. AND SUBSIDIARIES
SELECTED EXPLANATORY NOTES
AS OF SEPTEMBER 30, 2011 and 2010
Par. 7 (d) Selected Explanatory Notes Required Under SRC Rule 68.1
a. The Company’s consolidated interim financial reports are in compliance with
generally accepted accounting principles (GAAP) in the Philippines as set forth in
the Philippine Financial Reporting Standards (PFRS). The financial statements
of Philippine Airlines, Inc were originally presented in United States dollars, which
is their functional currency were restated to Philippine peso for purposes of
business combination in accordance with PAS 27.
b. Explanatory comments on the seasonality or cyclicality of interim operations.
PAL experiences a peak in holiday travel during the months of January, April,
May, June and December.
c. The nature and amount of items affecting assets, liabilities, equity, net income, or
cash flows which are unusual because of their nature, size, or incidence.
Not applicable. There were no items affecting assets, liabilities, equity, net
income, or cash flows that are unusual because of their nature, size, or
incidence.
d. The nature and amount of changes in estimates of amounts reported in prior
interim periods of the current financial year or changes in estimates of amounts
reported in prior financial years, if those changes have a material effect in the
current interim period.
Not Applicable. There were no changes in estimates of amounts reported in
prior interim periods of the current financial year or changes in estimates of
amounts reported in prior financial years.
e. Issuances, repurchases, and repayments of debt and equity securities.
Not Applicable. There were no issuances, repurchases, and repayments of
debt and equity securities.
f.
Dividends paid (aggregate or per share) separately for ordinary shares and other shares.
Not applicable. There were no dividends paid during the period.
g. Segment revenue and segment result for business segments or geographical
segments, whichever is the issuer’s primary basis of segment reporting.
Segment Information of Philippine Airlines, Inc.:
PAL has one reportable operating segment, which is the airline business (system-wide).
This is consistent with how the Group’s management internally monitors and analyzes
the financial information for reporting to the chief operating decision-maker, who is
responsible for allocating resources, assessing performance and making operating
decisions.
The revenue of the operating segment are mainly derived from rendering transportation
services and all sales are made to external customers.
Segment information for each reportable segment is shown in the following table:
Revenue
Interest income
Interest expense
Depreciation and amortization
Net income (loss)
Reportable segment assets
Reportable segment liabilities
Quarter Ended
September 2011
P17,124,427
62,862
(283,587)
(1,682,771)
(1,122,271)
73,623,009
70,669,161
Quarter Ended
September 2010
P17,338,751
60,189
(331,421)
(1,709,135)
1,440,621
71,683,903
67,156,175
The reconciliation of total revenue reported by reportable operating segment to revenue
in the consolidated statements of comprehensive income is presented in the following
table:
Total segment revenue of reportable
operating segments
Nontransport revenue and other income
Total Revenue
Quarter Ended
September 2011
Quarter Ended
September 2010
P17,187,289
765,900
P17,953,189
P17,398,940
792,383
P18,191,323
The reconciliation of total income reported by reportable operating segment to total
comprehensive loss in the consolidated statements of comprehensive income is
presented in the following table:
Total segment income (loss) of
reportable segments
Add (deduct) unallocated items:
Nontransport revenue and
other income
Nontransport expenses and
other income (charges)
Net income
Other comprehensive income (loss)
Total comprehensive income
Quarter Ended
September 2011
Quarter Ended
September 2010
(P1,122,271)
P1,440,621
765,900
(1,331,304)
(1,687,675)
(27)
(P1,687,702)
792,383
(1,016,566)
1,216,438
452
P1,216,890
The Company’s major revenue-producing asset is the fleet owned by PAL, which is
employed across its route network.
h. Material events subsequent to the end of the interim period that have not been
reflected in the financial statements for the interim period.
Not applicable. The Company has no material event subsequent to the end
of the interim period that have not been reflected in the financial statements for
the interim period.
i.
The effect of changes in the composition of the issuer during the interim period,
including business combinations, acquisition or disposal of subsidiaries and longterm investments, restructurings, and discontinuing operations.
Not applicable. There were no changes in the composition of the Company
during the interim period.
j.
Changes in contingent liabilities or contingent assets since the last annual
balance sheet date.
Not applicable. The Company has no contingent liabilities or assets.
k. Existence of material contingencies and any other events or transactions that are
material to an understanding of the current interim period.
Not applicable. There were no contingencies and any other events or
transactions that are material to an understanding of the current interim period.
Annex “B”
PAL HOLDINGS, INC.
AND SUBSIDIARIES
Management Discussion and Analysis of
Financial Condition and Results of Operations
For the period ended September 30, 2011
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
The financial statements form part of this 17Q.
Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation
The consolidated financial statements have been prepared using the historical cost
convention, except for buildings and improvements which are carried at revalued
amounts and available-for-sale investments and derivative financial instruments which
are carried at fair value. The consolidated financial statements are presented in
Philippine peso, the Parent Company’s functional and presentation currency, and
rounded to the nearest thousand, except when otherwise indicated.
Statement of Compliance
The consolidated financial statements have been prepared in accordance with Philippine
Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial years
except for the adoption of the following new and revised standards, amendments to
existing standards and new and amendments to Philippine Interpretations based on
International Financial Reporting Interpretations Committee (IFRIC) interpretations which
became effective to the Group beginning April 1, 2010.
•
Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate
Financial Statements (Amended). PFRS 3 introduces a number of changes in the
accounting for business combinations that will impact the amount of goodwill
recognized, the reported results in the period that an acquisition occurs, and future
reported results. The revised PAS 27 requires, among others, that (a) change in
ownership interests of a subsidiary (that does not result in loss of control) will be
accounted for as an equity transaction and will have no impact on goodwill nor will it
give rise to a gain or loss; (b) losses incurred by the subsidiary will be allocated
between the controlling and non-controlling interests (previously referred to as
“minority interests”) even if the losses exceed the non-controlling equity investment
in the subsidiary; and (c) on loss of control of a subsidiary, any retained interest will
be remeasured to fair value and this will impact the gain or loss recognized on
disposal. The changes introduced by the revised PFRS 3 must be applied
prospectively, while the revised PAS 27 must be applied retrospectively, with certain
exceptions. These changes will affect future acquisitions and transactions with noncontrolling interests. The adoption of these revised standards did not have a
significant impact on the Group’s consolidated financial statements.
•
Amendment to PAS 39, Financial Instruments: Recognition and Measurement Eligible Hedged Items, addresses only the designation of a one-sided risk in a
hedged item, and the designation of inflation as a hedged risk or portion in particular
situations. The amendment clarifies that an entity is permitted to designate a portion
of the fair value changes or cash flow variability of a financial instrument as a
hedged item. The adoption of this revised standard did not have a significant impact
on the Group’s consolidated financial statements.
•
Philippine Interpretation IFRIC 17, Distributions of Noncash Assets to Owners,
covers accounting for all nonreciprocal distribution of noncash assets to owners. It
provides guidance on when to recognize a liability, how to measure it and the
associated assets, and when to derecognize the asset and liability and the
consequences of doing so. The adoption of this revised standard did not have an
impact on the Group’s consolidated financial statements.
Improvements to PFRS
The omnibus amendments to PFRS issued in fiscal year 2010 were issued primarily with
a view to remove inconsistencies and clarify wordings. There are separate transitional
provisions for each standard. The adoption of these amendments did not significantly
impact the financial position or performance of the Group.
•
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, clarifies that
the disclosures required in respect of noncurrent assets and disposal groups
classified as held for sale or discontinued operations are only those set out in PFRS
5. The disclosure requirements of other PFRS only apply if specifically required for
such noncurrent assets or discontinued operations.
•
PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only
be reported when those assets and liabilities are included in measures that are used
by the chief operating decision maker.
•
PAS 1, Presentation of Financial Statements, clarifies that the terms of a liability that
could result at anytime in its settlement by the issuance of equity instruments at the
option of the counterparty do not affect its classification.
PAS 7, Statement of Cash Flows, explicitly states that only expenditure that results in
a recognized asset can be classified as a cash flow from investing activities.
•
•
PAS 17, Leases, removes the specific guidance on classifying land as a lease. Prior
to the amendment, leases of land were classified as operating leases. The
amendment now requires that leases of land are classified as either “finance” or
“operating” in accordance with the general principles of PAS 17. The amendments
were applied retrospectively.
•
PAS 36, Impairment of Assets, clarifies that the largest unit permitted for allocating
goodwill, acquired in a business combination, is the operating segment as defined in
PFRS 8 before aggregation for reporting purposes.
•
PAS 38, Intangible Assets, clarifies that if an intangible asset acquired in a business
combination is identifiable only with another intangible asset, the acquirer may
recognize the group of intangible assets as a single asset, provided the individual
assets have similar useful lives. It also clarifies that the valuation techniques
presented for determining the fair value of intangible assets acquired in a business
combination that are not traded in active markets are only examples and are not
restrictive on the methods that can be used.
•
PAS 39, Financial Instruments: Recognition and Measurement, clarifies the
following: (a) that a prepayment option is considered closely related to the host
contract when the exercise price of a prepayment option reimburses the lender up to
the approximate present value of lost interest for the remaining term of the host
contract; (b) that the scope exemption for contracts between an acquirer and a
vendor in a business combination to buy or sell an acquiree at a future date applies
only to binding forward contracts, and not derivative contracts where further actions
by either party are still to be taken; and (c) that gains or losses on cash flow hedges
of a forecast transaction that subsequently results in the recognition of a financial
instrument or on cash flow hedges of recognized financial instruments should be
reclassified in the period that the hedged forecast cash flows affect profit or loss.
•
Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, clarifies
that it does not apply to possible reassessment at the date of acquisition, to
embedded derivatives in contracts acquired in a business combination between
entities or businesses under common control or the formation of joint venture.
•
Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign
Operation, states that, in a hedge of a net investment in a foreign operation,
qualifying hedging instruments may be held by any entity or entities within the group,
including the foreign operation itself, as long as the designation, documentation and
effectiveness requirements of PAS 39 that relate to a net investment hedge are
satisfied.
Future Changes in Accounting Policies
The Group reasonably expects the following new and amended accounting standards
and interpretations that will become effective subsequent to fiscal year 2011 to be
applicable at a future date. The Group has not early adopted these standards,
interpretations and amendments to existing standards and does not expect the adoption
to have a significant impact on the consolidated financial statements. The relevant
disclosures will be included in the consolidated financial statements when these become
effective.
Effective in fiscal year 2012
•
Amendment to PAS 24, Related Party Disclosures, clarifies the definition of a related
party to simplify the identification of such relationships and to eliminate
inconsistencies in its application. The revised standard introduces a partial
exemption of disclosure requirements for government-related entities.
•
Amendment to PAS 32, Financial Instruments: Presentation - Classification of Rights
Issues, amended the definition of a financial liability in order to classify rights issues
(and certain options or warrants) as equity instruments in cases where such rights
are given prorata to all of the existing owners of the same class of an entity’s nonderivative equity instruments, or to acquire a fixed number of the entity’s own equity
instruments for a fixed amount in any currency.
•
Amendment to Philippine Interpretation IFRIC 14, Prepayments of a Minimum
Funding Requirement, provides guidance on assessing the recoverable amount of a
net pension asset. The amendment permits an entity to treat the prepayment of a
minimum funding requirement as an asset.
•
Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity
Instruments, clarifies that equity instruments issued to a creditor to extinguish a
financial liability qualify as consideration paid. The equity instruments issued are
measured at their fair value. In case that this cannot be reliably measured, the
instruments are measured at the fair value of the liability extinguished. Any gain or
loss is recognized immediately in profit or loss.
Improvements to PFRS
The omnibus amendments to PFRS issued in fiscal year 2011 were issued primarily with
a view to remove inconsistencies and clarify wordings. The amendments are effective
for annual periods beginning on or after March 31, 2011. The Group has not early
adopted the following amendments and anticipates that these changes will have no
material effect on the consolidated financial statements.
•
PFRS 3, Business Combinations, clarifies that the amendments to PFRS 7, PAS
32 and PAS 39, eliminating the exemption for contingent consideration, do not
apply to contingent consideration that arose from business combinations whose
acquisition dates precede the application of PFRS 3. The amendment limits the
scope of the measurement choices for components of non-controlling interests
that are present ownership interests and entitle their holders to a proportionate
share of the entity’s net assets, in the event of liquidation. The amendment also
requires an entity (in a business combination) to account for the replacement of
the acquiree’s share-based payment transactions (whether obliged or voluntarily)
and amendment specifies the accounting for share-based payment transactions
that the acquirer does not exchange for its own awards.
•
PFRS 7, Financial Instruments: Disclosures, emphasizes the interaction between
quantitative and qualitative disclosures and the nature and extent of risks
associated with financial instruments.
•
PAS 1, Presentation of Financial Statements, clarifies that an entity will present
an analysis of other comprehensive income for each component of equity, either
in the statement of changes in equity or in the notes to the financial statements.
•
PAS 27, Consolidated and Separate Financial Statements, clarifies that the
consequential amendments from PAS 27 made to PAS 21, The Effect of
Changes in Foreign Exchange Rates, PAS 28, Investments in Associates and
PAS 31, Interests in Joint Ventures, apply prospectively for annual periods
beginning on or after July 1, 2009 or earlier when PAS 27 is applied earlier.
•
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, clarifies that
when the fair value of award credits is measured based on the value of the
awards for which they could be redeemed, the amount of discounts or incentives
otherwise granted to customers not participating in the award credit scheme, is to
be taken into account.
Effective in fiscal year 2013
•
Amendments to PFRS 7, Financial Instruments: Disclosures - Transfers of
Financial Assets, allow users of financial statements to improve their
understanding of transfer transactions of financial assets (e.g., securitizations),
including understanding the possible effects of any risks that may remain with the
entity that transferred the assets. The amendments also require additional
disclosures if a disproportionate amount of transfer transactions are undertaken
around the end of a reporting period.
•
Amendment to PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying
Assets, provides a practical solution to the problem of assessing whether
recovery of an asset will be through use or sale. It introduces a presumption that
recovery of the carrying amount of an asset will normally be through sale.
Effective in fiscal year 2014
•
PFRS 9, Financial Instruments: Classification and Measurement, reflects the
first phase of the work on the replacement of PAS 39 and applies to
classification and measurement of financial assets and financial liabilities as
defined in PAS 39. The Group has not yet decided whether or not to early
adopt PFRS 9 for fiscal year 2011-2012 financial reporting. The interim
financial statements do not reflect the impact of subject standard.
The Group is currently assessing the impact of these accounting standards,
amendments and interpretations. The effects and required disclosures of the adoption
of the relevant standards, amendments and interpretations, if any, will be included in the
consolidated financial statements when these are adopted subsequent to fiscal year
2011.
Basis of Consolidation
The consolidated financial statements consist of the financial statements of the Parent
Company and its subsidiaries as at September 30, 2011 and March 31, 2011. The
financial statements of the subsidiaries are prepared using consistent accounting
policies as those of the Parent Company.
The subsidiaries and the related percentages of ownership of the Parent Company as of
September 30, 2011 and March 31, 2011 are as follows:
PAL
Abacus Distribution Systems Philippines, Inc.
(ADSPI)
Synergy Services Corporation (SSC)
Pacific Aircraft Ltd.
Pearl Aircraft Ltd.
Peerless Aircraft Ltd
PR
PAL
Percentages of
Ownership
Direct
Indirect
81.57%
–
–
–
–
–
–
82.33%
–
70.23%
54.19%
84.67%
84.67%
84.67%
–
3.10%
The subsidiaries operations and principal activity are as follows: ADSPI engages in
development and marketing of computerized airline reservation system; SSC engages in
sanitation and janitorial services; and Pacific Aircraft Ltd., Pearl Aircraft Ltd. and
Peerless Aircraft Ltd., used to be the trustor or beneficiary in the lease of aircraft prior to
the refinancing of the lease.
ADSPI and SSC are domiciled in the Philippines. The three other subsidiaries were
incorporated in the Cayman Islands.
Subsidiaries are consolidated from the date on which control is transferred to the Parent
Company and cease to be consolidated from the date on which control is transferred out
of the Parent Company. All intercompany accounts and transactions with subsidiaries
are eliminated in full.
The equity and net income attributable to noncontrolling interests of the consolidated
subsidiaries are recognized and, where material, are shown separately in the
consolidated statement of financial position and consolidated statement of
comprehensive income, respectively.
Noncontrolling interest represents the interest in a subsidiary, which is not controlled,
directly or indirectly through subsidiaries, by the Parent Company. Losses are attributed
to the noncontrolling interest even if these result to a deficit balance. Noncontrolling
interests represent the interests in PAL and PR not held by the Parent Company.
Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of cash with original
maturities of three months or less from dates of acquisition and that are subject to an
insignificant risk of changes in value.
Financial and Derivative Instruments
The Group recognizes a financial asset or a financial liability in the consolidated
statement of financial position when it becomes a party to the contractual provisions of
the instrument. All regular way purchases and sales of financial assets are recognized
on the trade date, i.e., the date the Group commits to purchase the assets. Regular way
purchases or sales are purchases or sales of financial assets that require the delivery of
assets within the period generally established by regulation or convention in the market
place.
The fair value of financial instruments including derivatives traded in active markets at
the end of the reporting period is based on their quoted market prices or dealer price
quotations (bid price for long positions and ask price for short positions), without any
deduction for transaction costs. When current bid and ask prices are not available, the
price of the most recent transaction is used since it provides evidence of the current fair
value as long as there has not been a significant change in economic circumstances
since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is
determined by using appropriate valuation techniques. Valuation techniques include
discounted cash flow methodologies, comparison to similar instruments for which market
observable prices exist, option pricing models, and other relevant valuation models. In
the absence of a reliable basis of determining fair value, investments in unquoted equity
securities are carried at cost, net of impairment.
Financial instruments are classified as debt or equity in accordance with the substance
of the contractual arrangement. Interest, dividends, gains, and losses relating to a
financial instrument classified as a debt, are reported as expense or income.
Distributions to holders of financial instruments classified as equity are charged directly
to consolidated equity.
Financial assets are classified as either financial assets at fair value through profit or
loss, loans and receivables, held-to-maturity investments or available-for-sale
investments, as appropriate. Financial liabilities are classified as either financial liabilities
at fair value through profit or loss or other financial liabilities.
When financial assets and financial liabilities are recognized initially, they are measured
at fair value. In the case of financial assets not classified at fair value through profit or
loss and financial liabilities classified as other liabilities, fair value at initial recognition
includes any directly attributable transaction cost.
The Group determines the
classification of its financial instruments upon initial recognition and, where allowed and
appropriate, reevaluates this designation at the end of each reporting period.
Financial assets and financial liabilities carried in the Group’s consolidated statement of
financial position include cash and cash equivalents, receivables, available-for-sale
investments, margin deposits and lease deposits, short-term and long-term obligations,
and derivative instruments such as fuel, interest rate and currency derivative
instruments.
“Day 1” difference
Where the transaction price in a non-active market is different to the fair value from
other observable current market transactions in the same instrument or based on a
valuation technique whose variables include only data from observable market, the
Group recognizes the difference between the transaction price and the fair value (a “Day
1” difference) in the consolidated profit or loss unless it qualifies for recognition as some
other type of asset. In cases where data used is not observable, the difference between
the transaction price and model value is only recognized in the consolidated profit or loss
when the inputs become observable or when the instrument is derecognized. For each
transaction, the Group determines the appropriate method of recognizing the “Day 1”
difference amount.
Financial Assets and Financial Liabilities at Fair Value through Profit or Loss
Financial assets and financial liabilities at fair value through profit or loss include
financial instruments held for trading, derivative financial instruments or those
designated upon initial recognition as at fair value through profit or loss.
Financial assets are classified as held for trading if they are acquired for the purpose of
selling in the near term. Derivatives, including separated embedded derivatives, are
also classified as held for trading unless they are designated as effective hedging
instruments or a financial guarantee contract. Gains or losses on investments held for
trading are recognized in the consolidated profit or loss. Interest earned or incurred and
dividend income is recorded when the right to received payment has been established.
Where a contract contains one or more embedded derivatives, the hybrid contract may
be designated as financial asset at fair value through profit or loss, except where the
embedded derivative does not significantly modify the cash flows or it is clear that
separation of the embedded derivative is prohibited.
Financial instruments may be designated as at fair value through profit or loss by
management on initial recognition if any of the following criteria are met:
•
•
•
The designation eliminates or significantly reduces the inconsistent treatment that
would otherwise arise from measuring the assets and liabilities or recognizing gains
or losses on them on a different basis;
The assets or liabilities are part of a group of financial assets or financial liabilities, or
both financial assets and financial liabilities, which are managed and their
performance is evaluated on a fair value basis, in accordance with a documented
risk management or investment strategy; or
The financial instrument contains an embedded derivative, unless the embedded
derivative does not significantly modify the cash flows or it is clear, with little or no
analysis, that it would not be separately recorded.
Financial assets and financial liabilities classified under this category are carried at fair
value in the consolidated statement of financial position, with any gain or loss being
recognized in consolidated profit or loss.
The Group accounts for its derivative transactions (including embedded derivatives)
under this category with fair value changes being reported directly to consolidated profit
or loss, except when the derivative is treated as an effective accounting hedge, in which
case the fair value change is reported in consolidated statement of comprehensive
income with the corresponding adjustment from the hedged transaction (fair value
hedge) and deferred in equity (cash flow hedge) under “Cumulative translation
adjustment” account.
Loans and Receivables
Loans and receivables are nonderivative financial assets with fixed or determinable
payments that are not quoted in an active market. This category includes cash and cash
equivalents, receivables arising from operations, deposits for aircraft leases and security
and refundable deposits. Such assets are carried at amortized cost using the effective
interest rate method. Gains and losses are recognized in the consolidated profit or loss
when the loans and receivables are derecognized or impaired, and through the
amortization process. Loans and receivables (or portion of loans and receivables) are
included in current assets if maturity is within 12 months from the end of the reporting
period. Otherwise, these are classified as noncurrent assets.
The Group classified its cash and cash equivalents, receivables, margin deposits and
lease deposits as loans and receivables as of September 30, 2011 and March 31, 2011.
Held-to-maturity Investments
Quoted nonderivative financial assets with fixed or determinable payments and fixed
maturities are classified as held-to-maturity when the Group has the positive intention
and ability to hold them to maturity. Investments intended to be held for an undefined
period are not included in this classification. Where the Group sells other than an
insignificant amount of held-to-maturity investments, the entire category would be tainted
and reclassified as available-for-sale investments. Other long-term investments that are
intended to be held-to-maturity, such as bonds, are subsequently measured at
amortized cost. This cost is computed as the amount initially recognized minus principal
repayments, plus or minus the cumulative amortization using the effective interest rate
method of any difference between the initially recognized amount and the maturity
amount. This calculation includes fees paid or received between parties to the contract
that are an integral part of the effective interest rate, issuance costs and all other
premiums and discounts. For investments carried at amortized cost, gains and losses
are recognized in the consolidated profit or loss when the investments are derecognized
or impaired, and through the amortization process. Assets under this category are
classified as current assets if maturity is within 12 months from the end of the reporting
period. Otherwise, these are classified as noncurrent assets.
The Group has no held-to-maturity investments as of September 30, 2011 and March
31, 2011.
Available-for-sale Investments
Available-for-sale investments are nonderivative financial assets that are designated as
available-for-sale or are not classified in any of the three preceding categories. After
initial recognition, available-for-sale investments are measured at fair value with gains or
losses being recognized in the consolidated statement of comprehensive income and as
a separate component of equity (“Cumulative change in fair value of available-for-sale
investments”) until the investment is derecognized or until the investment is determined
to be impaired at which time the cumulative gain or loss previously reported in equity is
included in consolidated profit or loss. The effective yield and (where applicable) results
of foreign exchange restatement for available-for-sale debt investments are reported
immediately in the consolidated profit or loss. These financial assets (or portion of these
financial assets) are classified as noncurrent assets unless the intention is to dispose
such assets within 12 months from the consolidated statement of financial position date.
Available-for-sale investments as of September 30, 2011 and March 31, 2011 represent
the Group’s investment in United States (US) Treasury bonds, shares of stock of
MacroAsia Corporation (MAC) and other equity instruments.
Other Financial Liabilities
Other financial liabilities pertain to financial liabilities that are not held for trading nor
designated as at fair value through profit or loss upon the inception of the liability.
These include liabilities arising from operations (e.g., payables and accruals) or
borrowings (e.g., long-term obligations).
The liabilities are recognized initially at fair value and are subsequently carried at
amortized cost, taking into account the impact of applying the effective interest rate
method of amortization (or accretion) for any related premium, discount and any directly
attributable transaction costs. These financial liabilities (or portion of these financial
liabilities) are reported as current liabilities if maturity is within 12 months from the end of
the reporting period or the Group does not have an unconditional right to defer
settlement of these liabilities for at least 12 months from the end of the reporting period.
Otherwise, they are classified as noncurrent assets.
Included under this category are the Group’s accounts payable, accrued expenses,
notes payable, due to related parties and long-term obligations.
Derivatives and Hedge Accounting
Freestanding derivatives
For the purpose of hedge accounting, hedges are classified primarily either as: (a) a
hedge of the fair value of an asset, liability or a firm commitment (fair value hedge); (b) a
hedge of the exposure to variability in cash flows attributable to an asset or liability or a
forecasted transaction (cash flow hedge); or (c) hedge of a net investment in a foreign
operation. The Group did not designate any of its derivatives as fair value hedges. The
Group designated its pay-fixed, receive-floating interest rate swaps and certain fuel
derivatives as cash flow hedges.
At the inception of a hedge relationship, the Group formally designates and documents
the hedge relationship to which the Group wishes to apply hedge accounting and the risk
management objective and strategy for undertaking the hedge. The documentation
includes identification of the hedging instrument, the hedged item or transaction, the
nature of the risk being hedged and how the entity will assess the hedging instrument’s
effectiveness in offsetting the exposure to changes in the hedged item’s fair value or
cash flows attributable to the hedged risk. Such hedges are assessed on an ongoing
basis to determine that they actually have been highly effective throughout the financial
reporting periods for which they were designated.
In cash flow hedges, changes in the fair value of a hedging instrument that qualifies as a
highly effective cash flow hedge are included in other comprehensive income, net of
related deferred income tax. The ineffective portion is immediately recognized in
consolidated profit or loss.
For cash flow hedges with critical terms that match those of the hedged items and where
there are no basis risks (such as the pay-fixed, receive-floating interest rate swaps), the
Group expects the hedges to exactly offset changes in expected cash flows relating to
the hedged risk (e.g., fluctuations in fuel price and benchmark interest rates). This
assessment on hedge effectiveness is performed on a quarterly basis by the Group by
comparing the critical terms of the hedges and the hedged items to ensure that they
continue to match and by evaluating the continued ability of the counterparties to
perform their obligations under the derivative contracts.
For cash flow hedges with basis risks (such as crude oil derivatives entered into as
proxy hedges for forecasted jet fuel purchases), the Group assesses the effectiveness
of its hedges (both on a prospective and retrospective basis) by using a regression
model to determine the correlation of the percentage change in prices of underlying
commodities used to hedge jet fuel to the percentage change in prices of jet fuel over a
specified period that is consistent with the hedge time horizon or 30 data points
whichever is longer.
If the hedged cash flow results in the recognition of an asset or a liability, gains and
losses initially recognized in equity are transferred from consolidated equity to the
consolidated profit or loss in the same period or periods during which the hedged
forecasted transaction or recognized asset or liability affect the consolidated profit or
loss.
When the hedge ceases to be highly effective, hedge accounting is discontinued
prospectively. In this case, the cumulative gain or loss on the hedging instrument that
has been reported directly in consolidated equity is recognized in the consolidated profit
or loss.
For derivatives that are not designated as effective accounting hedges, any gains or
losses arising from changes in fair value of derivatives are recognized directly in the
consolidated profit or loss.
Embedded derivatives
Embedded derivatives are separated from the hybrid contracts and accounted for at fair
value through profit or loss when the entire hybrid contracts (composed of the host
contract and the embedded derivative) are not accounted for at fair value through profit
or loss, the economic risks of the embedded derivatives are not closely related to those
of their respective host contracts, and a separate instrument with the same terms as the
embedded derivative would meet the definition of a derivative.
Changes in fair values are included in consolidated profit or loss. Derivatives are carried
as assets when the fair value is positive and as liabilities when the fair value is negative.
The Group assesses whether an embedded derivative is required to be separated from
the host contract and accounted for as a derivative when the entity first becomes a party
to the contract. Subsequent reassessment is prohibited unless there is a change in the
terms of the contract that significantly modifies the cash flows that otherwise would be
required under the contract, in which case reassessment is required. The Group
determines whether a modification to cash flows is significant by considering the extent
to which the expected future cash flows associated with the embedded derivative, the
host contract or both have changed and whether the change is significant relative to the
previously expected cash flows on the contract.
Derecognition of Financial Assets and Financial Liabilities
A financial asset (or, where applicable, a part of a financial asset or part of a group of
similar financial assets) is derecognized when:
i)
ii)
iii)
the right to receive cash flows from the asset has expired;
the Group retains the right to receive cash flows from the asset, but has
assumed an obligation to pay them in full without material delay to a third party
under a “pass-through” arrangement; or
the Group has transferred its right to receive cash flows from the asset and either
(a) has transferred substantially all the risks and rewards of the asset, or (b) has
neither transferred nor retained substantially all the risks and rewards of the
asset, but has transferred control of the asset.
When the Group has transferred its right to receive cash flows from an asset and has
neither transferred nor retained substantially all the risks and rewards of the asset nor
transferred control of the asset, the asset is recognized to the extent of the Group’s
continuing involvement in the asset.
A financial liability is derecognized when the obligation under the liability is discharged,
cancelled or has expired.
When an existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are substantially
modified, such modification is treated as a derecognition of the carrying value of the
original liability and the recognition of a new liability at fair value, and any resulting
difference is recognized in the consolidated profit or loss.
Impairment of Financial Assets
The Group assesses at the end of each reporting period whether there is objective
evidence that a financial asset may be impaired. If such evidence exist, any impairment
loss is recognized in the consolidated profit or loss.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, whenever it is probable that the Group will
not collect all amounts due according to the contractual terms of receivables, an
impairment loss has been incurred. The amount of the loss is measured as the
difference between the asset’s carrying amount and the present value of estimated
future cash flows discounted at the financial asset’s original effective interest rate. The
carrying amount of the asset is reduced either directly or through the use of an
allowance account. Any loss determined is recognized in the consolidated profit or loss.
The Group initially assesses whether objective evidence of impairment exists individually
for financial assets that are individually significant, and individually or collectively for
financial assets that are not individually significant. If it is determined that no objective
evidence of impairment exists for an individually assessed financial asset, whether
significant or not, the asset is included in a group of financial assets with similar credit
risk characteristics and that group of financial assets is collectively assessed for
impairment. Assets that are individually assessed for impairment and for which an
impairment loss is or continues to be recognized are not included in a collective
assessment of impairment.
In relation to receivables, a provision for impairment is made when there is objective
evidence (such as the probability of insolvency or significant financial difficulties of the
debtor) that the Group will not be able to collect all of the amounts due under the original
terms of the invoice. The carrying amount of the receivable is reduced through the use
of an allowance account. Impaired receivables are derecognized when they are
assessed as uncollectible.
Receivables, together with the associated allowance accounts, are written off when
there is no realistic prospect of future recovery and all collateral has been realized. If, in
a subsequent period, the amount of the estimated impairment loss decreases because
of an event occurring after the impairment was recognized, the previously recognized
impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in the consolidated profit or loss, to the extent that the carrying value of the
asset does not exceed its amortized cost at the reversal date.
Assets carried at cost
If there is objective evidence that an impairment loss on financial assets carried at cost
such as an unquoted equity instrument that is not carried at fair value because its fair
value cannot be measured reliably, or on a derivative asset that is linked to and must be
settled by delivery of such an unquoted equity instrument has been incurred, the amount
of the loss is measured as the difference between the asset’s carrying amount and the
present value of estimated future cash flows discounted at the current market rate of
return for a similar financial asset.
Available-for-sale investments
In case of equity investments classified as available-for-sale investments, impairment
would include a significant or prolonged decline in the fair value of the investments
below their cost. Where there is evidence of impairment loss, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less
any impairment loss on that financial asset previously recognized in income - is removed
from the consolidated equity and recognized in the consolidated profit or loss.
Impairment losses on equity investments are not reversed through consolidated profit or
loss. Increases in fair value after impairment are recognized directly as other
comprehensive income and consolidated statement of changes in equity.
In the case of debt instruments classified as available-for-sale, impairment is assessed
based on the same criteria as financial assets carried at amortized cost. Future interest
income is based on the reduced carrying amount and is accrued based on the rate of
interest used to discount cash flows for the purpose of measuring impairment loss. If, in
subsequent year, the fair value of a debt instrument increases and the increase can be
related objectively to an event occurring after the impairment loss was recognized
against income, the impairment loss is reversed through the consolidated profit or loss.
Offsetting of Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the
consolidated statement of financial position if, and only if, there is a currently
enforceable legal right to offset the recognized amounts and there is an intention to
settle on a net basis, or to realize the asset and settle the liability simultaneously. This is
not generally the case with master netting agreements, and the related assets and
liabilities are presented gross in the consolidated statement of financial position.
Expendable Parts, Fuel, Materials and Supplies
Expendable parts, fuel, materials and supplies are stated at the lower of cost and net
realizable value. Cost is determined using the weighted average method. Net realizable
value represents the amount expected to be realized from the use of the expendable
parts, fuel, materials and supplies, considering factors such as age and physical
condition of these assets.
Asset Held for Sale
Noncurrent assets and disposal groups are classified as held for sale if their carrying
amount will be recovered principally through a sale transaction rather than through
continuing use. This condition is considered met only when the sale is highly probable
and the asset (or disposal group) is available for immediate sale at its present condition.
Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification. However,
events or circumstances may extend the period to complete the sale beyond one year.
An extension of the period required to complete a sale does not preclude an asset (or
disposal group) from being classified as held-for-sale if the delay is caused by events or
circumstances beyond the Group’s control and there is sufficient evidence that the entity
remains committed to its plan to sell the asset (or disposal group).
Property and Equipment
Property and equipment (except buildings and improvements) are stated at cost less
accumulated depreciation and any impairment in value. Buildings and improvements
are stated at revalued amounts less accumulated depreciation and any impairment in
value. Revalued amounts were determined based on valuations performed by various
qualified and independent appraisers. Revaluations are made with sufficient regularity.
The latest appraisals reports are as of March 31, 2011.
For subsequent revaluations, the accumulated depreciation at the date of the revaluation
is eliminated against the gross carrying amount of the asset and the net amount restated
to the revalued amount of the asset. Any resulting increase in the asset’s carrying
amount as a result of the revaluation is recognized as other comprehensive income
credited directly to equity as “Revaluation increment”, net of the related deferred income
tax liability. Any resulting decrease is directly charged against the related revaluation
increment to the extent that the decrease does not exceed the amount of the revaluation
increment in respect of the same asset and any excess is charged against consolidated
profit or loss.
The initial cost of property and equipment comprises its purchase price, any related
capitalizable borrowing costs attributed to predelivery payments incurred on account of
aircraft acquisition and other significant assets under construction and other directly
attributable costs of bringing the asset to its working condition and location for its
intended use. Manufacturers’ credits that reduce the price of the aircraft, received from
aircraft and engine manufacturers are recorded upon delivery of the related aircraft and
engines. Such credits are applied as a reduction from the cost of the property and
equipment (including those under finance lease).
Expenditures incurred after the property and equipment have been put into operation,
such as repairs and maintenance costs, are normally charged to income in the period in
which the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be
obtained from the use of an item of property and equipment beyond its originally
assessed standard of performance, the expenditures are capitalized as additional cost of
property and equipment.
Depreciation, which commences when the asset is available for its intended use, is
computed on a straight-line basis over the following estimated useful lives of the assets:
Buildings and improvements
Passenger aircraft (owned and under finance
lease)
Other aircraft
Spare engines
Rotable and reparable parts
Other ground property and equipment
Number of Years
8 to 40
12 to 20
5 to 10
12 to 20
3 to 18
3 to 8
Leasehold improvements are amortized over the term of the lease or life of the
improvements, whichever is shorter.
Expenditures for heavy maintenance on passenger aircraft are capitalized at cost and
depreciated over the estimated number of years until the next major overhaul or
inspection. Generally, heavy maintenance visits are required every five to six years for
airframe and 10 years for landing gear.
The estimated useful lives, depreciation and amortization method and residual values
are reviewed periodically to ensure that the periods and method of depreciation and
residual values are consistent with the expected pattern of economic benefits from items
of property and equipment. Any changes in estimate arising from the review are
accounted for prospectively.
When assets are sold or retired, their costs, accumulated depreciation and amortization,
any impairment in value and related revaluation increment are eliminated from the
accounts. Any gain or loss resulting from their disposal is recognized as income and
included in the consolidated profit or loss.
The portion of “Revaluation increment, net of related deferred income tax”, realized
through depreciation or upon the disposal or retirement of the property is transferred to
the consolidated deficit.
Construction in progress represents predelivery payments and related borrowing costs
on aircraft under construction and aircraft modifications in progress and buildings and
improvements and other ground property under construction. Construction in progress
is not depreciated until such time when the relevant assets are completed and available
for use.
Asset Retirement Obligation
The Group is required under various aircraft lease agreements to restore the leased
aircraft to their original condition and to bear the cost of dismantling and restoration at
the end of the lease term. The Group provides for these costs over the terms of the
leases, based on aircraft hours flown until the next scheduled checks.
Investment Properties
Investment properties include parcels of land and building and building improvements
not used in operations.
Investment properties are measured initially at cost, including any transaction costs.
The carrying amount includes the cost of replacing part of an existing investment
property at the time that cost is incurred if the recognition criteria are met; and excludes
the costs of day-to-day servicing of an investment property.
Investment properties are subsequently measured at cost less accumulated depreciation
(except land) and any impairment in value. Land is subsequently carried at cost less
any impairment in value.
Depreciation and amortization of depreciable investment properties is calculated on a
straight-line basis over the estimated useful lives ranging from six to eight years.
Transfers are made to investment properties when, and only when, there is a change in
use, evidenced by cessation of owner-occupation, commencement of an operating lease
to another party or completion of construction or development. Transfers are made from
investment properties when, and only when, there is a change in use, evidenced by
commencement of owner-occupation or commencement of development with a view to
sale.
When an item of property and equipment previously carried at revalued amount is
transferred to investment properties, the carrying value at the date of reclassification is
retained as the new cost of the investment property.
Investment properties are derecognized when they are either disposed of or
permanently withdrawn from use and no future economic benefit is expected from their
disposal. Any gains or losses on the retirement or disposal of an investment property
are recognized in the consolidated profit or loss in the year of retirement or disposal.
Impairment of Property and Equipment and Investment Properties
The carrying values of property and equipment and investment properties are reviewed
for impairment when events or changes in circumstances indicate that the carrying
values may not be recoverable. If any such indication exists and where the carrying
values exceed the estimated recoverable amounts, the assets or cash generating units
are written down to their recoverable amounts. The recoverable amount is the greater of
fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated
future cash flows are discounted to their present value using a pretax discount rate that
reflects current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent cash inflows, the
recoverable amount is determined for the cash generating unit to which the asset
belongs. Impairment losses, if any, are recognized in the consolidated profit or loss.
An assessment is made at each reporting period as to whether there is any indication
that previously recognized impairment losses may no longer exist or may have
decreased. If such indication exists, the recoverable amount is estimated. A previously
recognized impairment loss is reversed only if there has been a change in the estimates
used to determine the asset’s recoverable amount since the last impairment loss was
recognized. If that is the case, the carrying amount of the asset is increased to its
recoverable amount. That increased amount cannot exceed the carrying amount that
would have been determined, net of depreciation and amortization, had no impairment
loss been recognized for the asset in prior years. Such reversal is recognized in the
consolidated profit or loss unless the asset is carried at revalued amount, in which case
the reversal is treated as a revaluation increase. After such reversal, the depreciation
charge is adjusted in future periods to allocate the asset’s revised carrying amount, less
any residual value, on a systematic basis over its remaining useful lives.
Leases
The determination of whether the arrangement is, or contains a lease is based on the
substance of the arrangement at inception date of whether the fulfillment of the
arrangement depends on the use of a specific asset or assets or the arrangement
conveys a right to use the asset. A reassessment is made after the inception of the
lease if any of the following applies: (a) there is a change in contractual terms, other
than a renewal or extension of the arrangement; (b) a renewal option is exercised or
extension granted, unless the term of the renewal or extension was initially included in
the lease term; (c) there is a change in the determination of whether fulfillment is
dependent on a specified asset; or (d) there is substantial change to the asset.
Where the reassessment is made, lease accounting shall commence or cease from the
date when the change in circumstances gave rise to the reassessment for scenarios (a),
(c), or (d) above, and at the date of renewal or extension period for scenario (b).
Group as lessee
Finance leases, which transfer to the Group substantially all the risks and rewards
incidental to ownership of the leased item, are capitalized at the inception of the lease at
the fair value of the leased property or, if lower, at the present value of the minimum
lease payments. Obligations arising from aircraft under finance lease agreements are
classified in the consolidated statement of financial position as part of “Long-term
obligations”.
Lease payments are apportioned between financing charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the
liability. Financing charges are charged directly against consolidated profit or loss.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of
the asset and the lease term, if there is no reasonable certainty that the Group will
obtain ownership by the end of the lease term.
Leases where the lessor retains substantially all the risks and rewards of ownership of
the asset are classified as operating leases. Operating lease expense is recognized in
the consolidated profit or loss on a straight-line basis over the terms of the lease
agreements.
Group as lessor
Leases where the Group does not transfer substantially all the risks and rewards of
ownership of the assets are classified as operating leases. Initial direct costs incurred in
negotiating operating leases are added to the carrying amount of the leased asset and
recognized over the lease term on the same basis as the rental income. Contingent
rents are recognized as revenue in the period in which they are earned.
Provisions and Contingencies
Provisions are recognized when (a) the Group has a present obligation (legal or
constructive) as a result of a past event; (b) it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation; and (c) a reliable
estimate of the amount of the obligation can be made. Where the Group expects a
provision to be reimbursed, for example under an insurance contract, the reimbursement
is recognized as a separate asset but only when the reimbursement is virtually certain.
If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pretax rate that reflects current market
assessments of the time value of money and, where appropriate, the risks specific to the
liability. Where discounting is used, the increase in the provision due to the passage of
time is recognized as interest expense.
Contingent liabilities are not recognized in the consolidated statement of financial
position. They are disclosed in the notes to consolidated financial statements unless the
possibility of an outflow of resources embodying economic benefits is remote. A
contingent asset is not recognized in the consolidated statement of financial position but
disclosed in the notes to consolidated financial statements when an inflow of economic
benefits is probable. If it is virtually certain that an inflow of economic benefits will arise,
the asset and the related income are recognized in the consolidated financial
statements.
Equity
Capital stock is measured at par value for all shares issued. Incremental costs incurred
directly attributable to the issuance of new shares are shown in equity as a deduction
from proceeds, net of tax.
When the shares are sold at premium, the difference between the proceeds and the par
value is credited to the “Additional-paid in capital” account. When shares are issued for
a consideration other than cash, the proceeds are measured by the fair value of the
consideration received. In case the shares are issued to extinguish or settle the liability,
the shares shall be measured either at the fair value of the shares issued or fair value of
the liability settled, whichever is more reliably determinable.
Deficit represents the cumulative balance of net income or loss, net of any dividend
declaration and other capital adjustments.
Where any member of the Group purchases its own capital stock (treasury shares), the
consideration paid, including any directly attributable incremental costs (net of related
taxes), is deducted from equity until the shares are cancelled, reissued or disposed of.
Where such shares are subsequently sold or reissued, any consideration received, net
of any directly attributable incremental transaction costs and the related income tax
effect, is included in the consolidated equity.
Revenue and Related Commissions
Passenger ticket and cargo waybill sales, excluding portion relating to awards under the
Frequent Flyer Program, are initially recorded as “Unearned transportation revenue” in
the consolidated statement of financial position until recognized as “Revenue” in the
consolidated profit or loss when the transportation service is rendered (e.g., when
passengers and cargo are flown/lifted). Revenue is measured at fair value of the
consideration received or receivable excluding sales taxes, discounts and commissions.
Revenue also includes recoveries from surcharges during the year.
The related commission is recognized as expense in the same period when the
transportation service is provided and is included as part of “Reservation and sales” in
the consolidated profit or loss.
Liability Under Frequent Flyer Program
The Group operates a frequent flyer program called “Mabuhay Miles”. A portion of
passenger revenue attributable to the award of frequent flyer miles, estimated based on
expected utilization of these benefits, is deferred until utilized. The miles expected to be
redeemed are measured at fair value which is estimated using the applicable fare based
on the historical redemption. The deferred revenue is included under “Reserves and
other noncurrent liabilities” in the consolidated statement of financial position. Any
remaining unutilized benefits are recognized as revenue upon redemption or expiry.
Other Comprehensive Income
Other comprehensive income comprises items of income and expense (including items
previously presented under the consolidated statement of changes in equity) that are not
recognized in the consolidated profit or loss for the year in accordance with PFRS.
Other comprehensive income of the Group includes changes in revaluation increment in
property, gains and losses on remeasuring available-for-sale investments, movements in
cumulative translation adjustment and any effective portion of gains and losses on
hedging instruments designated as cash flow hedges.
Interest, Dividend and Lease Income
Interest on cash, cash equivalents and other short-term cash investments is recognized
as the interest accrues using the effective interest rate method. Dividend income from
available-for-sale equity investments is recognized when the Group’s right to receive
payment is established. Lease income is recognized on a straight-line basis over the
lease term.
Retirement Benefits Cost
Retirement benefits cost under the defined benefit plan is actuarially determined using
the projected unit credit method. This method reflects services rendered by employees
up to the date of valuation and incorporates assumptions concerning employees’
projected salaries. Actuarial valuations are conducted with sufficient regularity with
option to accelerate when significant changes to underlying assumptions occur.
Actuarial gains and losses are recognized as income or expense when the net
cumulative unrecognized actuarial gains and losses for the plan at the end of the
previous reporting period exceeded 10% of the higher of the present value of defined
benefit obligation and the fair value of plan assets at that date. These gains or losses
are recognized over the expected average remaining working lives of the employees
participating in the plan.
Past service cost is recognized as an expense on a straight-line basis over the average
period when the benefits become vested. If the benefits are already vested immediately
following the introduction of, or changes to, the retirement plan, past service cost is
recognized immediately. Retirement benefits cost includes current service cost, interest
cost, amortization of unrecognized past service costs, actuarial gains and losses,
experience adjustments, effect of any curtailment or settlement and changes in actuarial
assumptions over the expected average remaining working lives of covered employees.
The defined benefit liability is the aggregate of the present value of the defined benefit
obligation and actuarial gains and losses not recognized, reduced by past service cost
not yet recognized, and the fair value of plan assets out of which the obligations are to
be settled directly. If such aggregate is negative, the asset is measured at the lower of
such aggregate or the aggregate of cumulative unrecognized net actuarial losses and
past service cost and the present value of any economic benefits available in the form of
refunds from the plans or reductions in the future contributions to the plan.
Retirement benefits cost under the defined contribution plan is based on the established
amount of contribution and is recognized as expense in the same year as the related
employee services are rendered.
Borrowing Costs
Borrowing costs are capitalized if they are directly attributable to the acquisition or
construction of a qualifying asset. Capitalization of borrowing costs commences when
the activities to prepare the asset are in progress and expenditures and borrowing costs
are being incurred. Borrowing costs are capitalized until the assets are substantially
ready for their intended use. All other borrowing costs are expensed as incurred.
Expenses
Expenses are recognized when incurred. These are measured at the fair value of the
consideration paid or payable.
Income Taxes
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured
at the amount expected to be recovered from or paid to the taxation authorities. The tax
rates and tax laws used to compute the amounts are those that have been enacted or
substantively enacted as of the end of reporting period.
Deferred income tax
Deferred income tax is provided, using the balance sheet liability method, on all
temporary differences at the end of reporting period between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences,
including asset revaluations. Deferred income tax assets are recognized for all
deductible temporary differences, carryforward benefits of unused tax credits from the
excess of minimum corporate income tax (MCIT) over the regular corporate income tax
and unused net operating loss carryover (NOLCO), to the extent that it is probable that
sufficient future taxable profits will be available against which the deductible temporary
differences and carryforward benefits of unused tax credits and unused NOLCO can be
utilized. Deferred income tax, however, is not recognized when it arises from the initial
recognition of an asset or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit nor taxable profit or
loss.
Deferred income tax liabilities are not provided on nontaxable temporary differences
associated with investments in domestic subsidiaries and associates. With respect to
investments with other subsidiaries and associates, deferred income tax liabilities are
recognized except where the timing of reversal of the temporary differences can be
controlled and it is probable that the temporary difference will not reverse in the
foreseeable future.
The carrying amount of deferred income tax assets is reviewed at each reporting period
and reduced to the extent that it is no longer probable that sufficient future taxable
profits will be available to allow all or part of the deferred income tax asset to be utilized.
Unrecognized deferred income tax assets are reassessed at each reporting period and
are recognized to the extent that it has become probable that sufficient future taxable
profits will allow the deferred income tax asset to be recovered.
Deferred income tax assets and deferred income tax liabilities are measured at the tax
rates that are expected to apply to the period when the asset is realized or the liability is
settled, based on tax rates and tax laws that have been enacted or substantively
enacted at the end of the reporting period.
Income tax relating to items recognized directly in equity is recognized in consolidated
equity and not included in the calculation of the consolidated profit or loss for the period.
Deferred income tax assets and deferred income tax liabilities are offset if a legally
enforceable right exists to set off current income tax assets against current income tax
liabilities and the deferred income taxes relate to the same taxable entity and the same
taxation authority.
Functional Currency and Foreign Currency-denominated Transactions and Translations
Each entity in the Group determines its own functional currency and the items included
in the separate financial statements of each entity are measured using the functional
currency. Transactions in foreign currencies are initially recorded using the functional
currency rate at the date of the transaction. Outstanding monetary assets and liabilities
denominated in foreign currencies are translated using the functional currency rate of
exchange at the end of reporting period.
All differences are taken to other
comprehensive income. Non-monetary items that are measured in terms of historical
cost in a foreign currency are translated using the exchange rates at the dates of the
transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value was determined.
The results of operations and financial position of all Group entities (none of which has
the functional currency of a hyperinflationary economy) that have functional currencies
different from Philippine peso, which is the functional and presentation currency of the
Parent Company, are translated to Philippine peso as follows:
a. assets and liabilities for each statement of financial position presented are translated
at the closing rate at the end of reporting period;
b. comprehensive income items for each statement of comprehensive income
presented are translated at the monthly average exchange rates (unless this
average is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are
translated at the dates of the transactions);
c. capital stock and other equity items resulting from transactions with equity
holders
(i.e., additional paid-in capital) and equity items resulting from income and expenses
directly recognized in equity (i.e., revaluation increment in property) are translated
using the rates prevailing on the transaction dates; and
d. all resulting exchange differences are recognized as other comprehensive income
and a separate component of the consolidated equity, in the account “Cumulative
translation adjustment”.
On consolidation, exchange differences arising from the translation of the net investment
in foreign operations are taken to the consolidated equity and recorded as other
comprehensive income. When a foreign operation is sold or disposed of, exchange
differences that were previously recorded in the consolidated equity are recognized in
the consolidated profit or loss.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is calculated based on net income (loss) and total
comprehensive income (loss) for the year. EPS is calculated by dividing net income
(loss) before other comprehensive income or total comprehensive income (loss) for the
year, as applicable, by the weighted average number of issued and outstanding shares
of stock during the year, after giving retroactive effect to any stock dividends declared or
stock rights exercised. The Group has no dilutive potential common shares.
Events after the Reporting Period Date
Post year-end events that provide additional information about the Group’s position at
the reporting period date (adjusting events), if any, are reflected in the consolidated
financial statements. Post year-end events that are not adjusting events are disclosed in
the notes to consolidated financial statements when material.
II: Financial Risk Management Objectives and Policies
Risk Management Structure
BOD
The BOD is mainly responsible for the overall risk management approach and for the
approval of risk strategies and policies of the Group.
Treasury Risk Committee
The Treasury Risk Committee has the overall responsibility for the development of
financial risk strategies, principles, frameworks, policies and limits. It establishes a
forum of discussion of the Group’s approach to financial risk issues (fuel price and
foreign exchange risk, in particular) in order to make relevant decisions.
Treasury Risk Office
The Treasury Risk Office is responsible for the comprehensive monitoring, evaluation
and analysis of the Group’s financial risks in line with the policies and limits set by the
Treasury Risk Committee. The Treasury Risk Office conducts marking-to-market of
derivative positions and daily calculation and reporting of Value-at-Risk (VaR) amounts.
Financial Risk Management
The Group’s principal financial instruments, other than derivatives, consist of loans,
cash and cash equivalents, investments in equities, and deposits. The main purpose of
these financial instruments is to raise financing for the Group’s operations. The Group
has various other financial assets and financial liabilities such as receivables, accounts
payables, and accrued expenses, which arise directly from its operations.
The main risks arising from the use of financial instruments are market risk (consisting
of foreign exchange risk, cash flow interest rate risk, fuel price risk and equity price
risk), liquidity risk, counterparty risk and credit risk.
PAL uses derivative financial instruments to manage its exposures to currency, interest
and fuel price risks arising from PAL’s operations and its sources of financing. The
details of PAL’s derivative transactions, including the risk management objectives and
the accounting results, are discussed in this note.
Market risks
The Group’s operating, investing, and financing activities are directly affected by
changes in foreign exchange rates, interest rates, and fuel prices. Increasing market
fluctuations in these variables may result in significant equity, cash flow and profit
volatility risks for the Group. For this reason, the Group seeks to manage and control
these risks primarily through its regular operating and financing activities, and through
the execution of a documented hedging strategy.
Management of financial market risk is a key priority for the Group. The Group
generally applies sensitivity analysis in assessing and monitoring its market risks.
Sensitivity analysis enables management to identify the risk position of the Group as
well as provide an approximate quantification of the risk exposures. Estimates provided
for foreign exchange risk, cash flow interest rate risk, price interest rate risk, fuel price
risk and equity price risk are based on the historical volatility for each market factor,
with adjustments being made to arrive at what the Group considers to be reasonably
possible.
Foreign exchange risk
The Group is exposed to foreign exchange rate fluctuations arising from its revenue,
expenses and borrowings in currencies other than its functional currency. The Group
manages this exposure by matching its receipts and payments for each individual
currency. Any surplus is sold as soon as practicable. PAL also uses foreign currency
forward contracts and options to hedge a portion of its exposure. PAL’s significant
foreign currency-denominated monetary assets and liabilities (in Philippine peso
equivalents) as of September 30, 2011 and March 31, 2011 are as follows:
September 30,
2011
March 31,
2011
P 1,817,177
7,159,647
1,859,706
10,836,530
P 2,426,377
5,748,521
1,164,029
P 9,338,927
(1,333,899)
(4,860,901)
(915,136)
(P 7,109,936)
(1,361,926)
(4,360,854)
(888,258)
(P 6,611,038)
P 3,726,594
P 2,727,889
(5,732,107)
(3,406,686)
(P 9,138,793)
(5,312,184)
(3,039,689)
(P 8,351,873)
(P 5,412,199)
(P 5,623,984)
Financial assets and financial liabilities
Financial Assets:
Cash
Receivables
Others*
Financial Liabilities:
Accounts payable
Accrued expenses
Others**
Net foreign currency-denominated financial
assets (liabilities)
Nonfinancial liabilities
Accrued employee benefits
Provisions
Net foreign currency-denominated monetary
liabilities
*
**
Includes miscellaneous deposits and security deposits.
Substantially pertaining to notes payable to a local bank.
The Group recognized a P 123,717 foreign exchange gain for the period April to
September 2011 and P 209,230 foreign exchange loss in March 31, 2011.
The Group’s foreign currency-denominated exposures comprise primarily of Philippine
peso (PHP) and JPY. Other foreign currency exposures include Canadian dollar (CAD),
Euro (EUR), Australian dollar (AUD), Singaporean dollar (SGD), Chinese Yuan (CNY),
Thai Baht (THB), and Hong Kong dollar (HKD).
Cash flow interest rate risk
The Group’s exposure to cash flow interest rate risk arises from the regular repricing of
interest on its floating-rate loans and interest rate swaps. The Group’s policy on interest
rate risk is designed to limit the Group’s exposure to fluctuating interest rates. The ratio
of floating rate to the total borrowings is 0.70:1 and 0.68:1 as of September 30, 2011
and March 31, 2011, respectively.
Fuel price risk
PAL is exposed to price risk on jet fuel purchases. This risk is managed by a
combination of strategies with the objective of managing price levels within an
acceptable band through various types of derivative and hedging instruments. In
managing this significant risk, PAL has a portfolio of swaps, collars, and compound
structures with options. PAL implements such strategies to manage and minimize the
risks within acceptable risk parameters.
PAL’s fuel derivatives are viewed as economic hedges and are not held for speculative
purposes. Short-term exposures are hedged primarily with fuel derivatives indexed to jet
fuel. On long-term exposures, PAL also uses fuel derivatives indexed to crude oil as
proxy hedges due to liquidity constraints in the refined oil products market (i.e., jet fuel).
PAL uses a Value-at-Risk (VaR) computation to estimate the potential three-day loss in
the fair value of its fuel derivatives. The VaR computation is a risk analysis tool
designed to estimate statistically the maximum potential loss from adverse movement in
fuel prices.
Assumptions and limitations of VaR
The VaR methodology employed by PAL uses a three-day period due to the assumption
that not all positions could be undone in a single day given the size of the positions. The
VaR computation makes use of Monte Carlo simulation with multi-factor models. Multifactor models ensure that the simulation process takes into account mean reversion and
seasonality. It captures the complex dynamics of the term structure of commodity
markets, such as contango and backwardation. The VaR estimates are made assuming
normal market conditions using a 95% confidence interval and are determined by
observing market data movements over a 90-day period.
The estimated potential three-day losses on its fuel derivative transactions, as calculated
in the VaR model, amounted to P 97,452 and P 66,284 as of September 30, 2011 and
March 31, 2011, respectively.
The high, average and low VaR amounts are as follows:
April 1, 2011 to September 30, 2011
April 1, 2010 to March 31, 2011
High
P128,618
P102,722
Average
P80,902
P54,568
Low
P41,268
P23,030
Liquidity risk
Liquidity risk arises from the possibility that the Group may encounter difficulties in
raising funds to meet commitments from financial instruments (e.g., long-term
obligations) or that a market for derivatives may not exist in some circumstances.
The Group’s objectives to manage its liquidity profile are: (a) to ensure that adequate
funding is available at all times; (b) to meet commitments as they arise without incurring
unnecessary costs; (c) to be able to access funding when needed at the least possible
cost; and (d) to maintain an adequate time spread of refinancing maturities.
The tables below summarize the maturity analysis of the Group’s financial liabilities
based on contractual undiscounted payments (principal and interest):
As of September 30, 2011
>1-<2 Years
>2-<3 Years
>3-<4 Years
>4-<5 Years
<1 Year
Financial Liabilities
Accounts payable and accrued expenses
Due to related parties
Notes payable (noncurrent portion is
included under “Other noncurrent
liabilities”)
Obligation under finance lease
Other long-term liabilities
Other liability (under “Accrued expense”
and “Other noncurrent liabilities”)
Derivative instruments:
Contractual receivable
Contractual payable
Fuel derivatives
>5 Years
Total
P 15,096,425
P–
P–
P–
P–
P–
10,000
–
–
–
–
–
P
15,096,425
10,000
5,981,454
21,087,879
3,777,883
1,109,954
–
–
4,912,102
2,882,500
–
–
5,000,795
2,303,302
–
–
1,491,882
3,995,345
–
–
1,131,241
–
–
–
4,675,981
–
5,981,454
21,087,879
20,989,884
10,291,101
414,032
414,032
241,508
–
–
–
1,069,572
(440,968)
460,371
319,864
5,641,136
P 26,729,015
–
–
9,329
8,217,963
P 8,217,963
–
–
–
7,545,605
P 7,545,605
–
–
–
5,487,227
P 5,487,227
–
–
–
1,131,241
P 1,131,241
–
–
–
4,675,981
P 4,675,981
(440,968)
460,371
329,193
32,699,153
P
53,787,032
>1-<2 Years
>2-<3 Years
>3-<4 Years
>4-<5 Years
>5 Years
Total
As of March 31, 2011
<1 Year
Financial Liabilities
Accounts payable and accrued expenses
Due to related parties
Notes payable (noncurrent portion is
included under “Other noncurrent
liabilities”)
Obligation under finance lease
Other long-term liabilities
Other liability (under “Accrued expense”
and “Other noncurrent liabilities”)
Derivative instruments:
Contractual receivable
Contractual payable
Fuel derivatives
P
15,213,603
10,000
P–
P–
P–
P–
P–
–
–
–
–
–
P
15,213,603
10,000
5,616,561
20,840,164
5,643,431
2,199,049
–
–
2,945,146
903,190
–
–
7,651,355
889,387
–
–
1,850,830
852,056
–
–
1,122,227
2,395,948
–
–
5,195,156
–
5,616,561
20,840,164
24,408,145
7,239,630
414,025
414,026
414,025
34,509
–
–
1,276,585
(982,583)
973,381
(124,624)
8,122,679
P 28,962,843
–
–
–
4,262,362
P 4,262,362
–
–
–
8,954,767
P 8,954,767
–
–
–
2,737,395
P 2,737,395
–
–
–
3,518,175
P 3,518,175
–
–
–
5,195,156
P 5,195,156
(982,583)
973,381
(124,624)
32,790,534
P
53,630,698
The Group’s total financial liabilities due to be settled amounting to P 26,729,015 in
September 30, 2011 and P 28,962,843 in March 31, 2011, include liabilities that
management considers as working capital aggregating to P 21,087,879 and
P 20,840,164, respectively. Accounts payable and accrued expenses of P 15,096,425 in
September 30, 2011 and P 15,213,603 in March 31, 2011 and due to related parties of P
10,000 as of September 30, 2011 & March 31, 2011 include liabilities that are payable on
demand but are expected to be renegotiated in the future. For the other liabilities
amounting to P 5,641,136 in September 30, 2011 and P 8,122,679 in March 31, 2011,
management expects to settle these from the Group’s cash to be generated from
operations and the Group’s financial assets as shown below:
As of September 30, 2011:
>1-<2
Years
>2-<3
Years
>3-<4
Years
>4-<5
Years
>5 Years
Total
P
2,573,876
P–
P–
P–
P–
P–
P 2,573,876
608,193
5,610,871
P 8,792,940
–
–
P–
–
–
P–
–
–
P–
–
–
P–
–
–
P–
608,193
5,610,871
P 8,792,940
<1 Year
Financial Assets
Cash
Loans and receivables
Cash equivalents
Receivables - net
As of March 31, 2011
Financial Assets
Cash
Loans and receivables
Cash equivalents
Receivables - net
<1 Year
>1-<2
Years
>2-<3
Years
>3-<4
Years
>4-<5
Years
>5 Years
Total
P 3,869,578
P–
P–
P–
P–
P–
P 3,869,578
671,001
4,975,642
P 9,516,221
–
–
P–
–
–
P–
–
–
P–
–
–
P–
–
–
P–
671,001
4,975,642
P 9,516,221
Counterparty risk
The Group’s counterparty risk encompasses issuer risk on investment securities; credit
risk on cash in banks, time deposits, and security deposits; and settlement risk on
derivatives. The Group manages its counterparty risk by transacting with counterparties
of good financial condition and selecting investment grade securities. Settlement risk on
derivatives is managed by limiting aggregate exposure on all outstanding derivatives to
any individual counterparty, taking into account its credit rating. The Group also enters
into master netting arrangements and implements counterparty and transaction limits to
avoid concentration of counterparty risk.
The table below shows the maximum counterparty exposure before taking account any
collateral and other credit enhancements of the Group as of September 30, 2011 and
March 31, 2011:
( In Thousands)
Cash in banks and cash equivalents, excluding
cash on hand
Receivables - net
Investment in MAC
Derivative instruments
Margin deposits, lease deposits and others
September 30, 2011
P 3,022,192
March 31, 2011
P 4,436,086
5,610,871
251,680
47,303
7,653,831
P 16,585,877
4,975,642
281,600
148,498
6,804,007
P 16,645,833
Credit risks
The Group’s exposure to credit risk arises from the possibility that agents and other
counterparties may fail to fulfill their agreed obligations and that the collaterals held may
not be sufficient to cover the Group’s claims. To manage such risk, the Group, through
its Credit and Collection Department, employs a credit evaluation process prior to the
accreditation or re-accreditation of its travel and cargo agents. The Group considers,
among other factors, the size, paying habits and the financial condition of the agents.
To further mitigate the risk, the Group requires from its agents financial guarantees in
the form of cash bonds, letters of credit and assignment of time deposits.
The Group, to the best of its knowledge, has no significant concentration of credit risk
with any counterparty.
III: Financial Instruments
Fair Values of Financial Instruments
The table below presents a comparison by category of the carrying amounts and fair
values of the Group’s financial instruments:
March 31, 2011
September 30, 2011
Fair Value
Carrying Value
Fair Value Carrying Value
(In Thousands)
Financial Assets
Cash
Loans and Receivables:
Cash equivalents
Receivables - net
General traffic
Non-trade*
Margin deposits, lease deposits
and others
Available-for-sale Investments
Equity investments:
Quoted
Unquoted
Derivative Asset - Fair value
through profit or loss
Financial Liabilities
Financial liabilities carried at
amortized cost:
Accounts payable and accrued
expenses
Notes payable
Obligations under finance
leases
Other long-term liabilities
Due to related parties
Other liability (under accrued
expense and other noncurrent
liabilities)
Derivative liabilities:
Fair value through profit or loss
P 2,573,876
P 2,573,876
P 3,869,578
P 3,869,578
608,193
608,193
671,001
671,001
4,448,927
1,161,944
4,448,927
1,161,944
3,996,965
978,677
3,996,965
978,677
7,653,831
16,446,771
7,598,557
16,391,497
6,804,007
12,450,650
6,663,779
12,310,422
258,600
274,883
533,483
258,600
274,883
533,483
288,502
272,472
560,974
288,502
272,472
560,974
47,303
47,303
148,498
148,498
P 17,027,557
P 16,972,283
P 17,029,700
P 16,889,472
P 15,096,425
P 15,096,425
P 15,213,603
P 15,213,603
5,956,664
5,956,664
5,591,428
5,591,428
18,674,229
9,094,775
10,000
19,693,257
9,034,989
10,000
21,655,253
6,354,801
10,000
22,220,468
6,281,224
10,000
998,968
49,831,061
1,035,014
50,826,349
1,129,997
49,955,082
1,202,011
50,518,734
390,161
390,161
P 50,221,222
390,161
390,161
P 51,216,510
10,288
10,288
P 49,965,370
10,288
10,288
P 50,529,022
* Excludes receivables arising from statutory requirements (net of allowance amounting to P 496,330 and
P 395,273 as of September 30, 2011 and March 31, 2011, respectively).
The following methods and assumptions are used to estimate the fair value of each
class of financial instruments:
Cash and cash equivalent, short-term investments and receivables
The carrying amounts of cash and cash equivalents approximate fair value. The
carrying amounts of receivables approximate fair value due to their short-term
settlement period.
Other current financial instruments
Similarly, the historical cost carrying amounts of receivables, miscellaneous deposits,
accounts payable and accrued expenses approximate their fair values due to the shortterm nature of these accounts.
Equity investments (available-for-sale investments)
The fair values of equity investments are generally based upon quoted market prices.
Unquoted equity investments are carried at cost (subject to impairment).
Margin deposits, lease deposits and others
The fair value of margin deposits, lease deposits and others is determined using
discounted cash flow techniques based on prevailing market rates. Discount rates used
are 0.64% to 2.08% and 1.46% to 3.86% for September 30, 2011 and March 31, 2011,
respectively.
Long-term obligations and short-term, fixed rate notes payable
The fair value of long-term obligations (whether fixed or floating) is generally based on
the present value of expected cash flows with discount rates that are based on riskadjusted benchmark rates (in the case of floating rate liabilities with quarterly repricing,
the carrying value approximates the fair value in view of the recent and regular repricing
based on current market rates). The discount rates used for USD-denominated loans
range from 1.15% to 4.35% and 1.12% to 3.29% for September 30, 2011 and March 31,
2011, respectively. The discount rates used for PHP-denominated loans amounted to
5.03% for March 31, 2011. The discount rates used for JPY-denominated loans
amounted to 1.40% and 1.60% for September 30, 2011 and March 31, 2011,
respectively.
The carrying value of the short-term, fixed rate notes payable approximates its fair value
due to the short-term settlement period of the notes (i.e., effect of discounting is
minimal)
Derivatives
The fair value of forward exchange contracts is calculated by reference to current
forward exchange rates for contracts with similar maturity profiles.
The fair value of interest rate swap transactions is the net present value of estimated
future cash flows.
The fair values of fuel derivatives that are actively traded on an organized and liquid
market are based on published prices. In the absence of an active and liquid market,
and depending on the type of instrument and the underlying commodity, the fair value of
fuel derivatives is determined by the use of either present value methods or standard
option valuation models. The valuation inputs on these fuel derivatives are based on
assumptions developed from observable information, including (but not limited to) the
forward curve derived from published or futures prices adjusted for factors such as
seasonality considerations and the volatilities that take into account the impact of spot
prices and the long-term price outlook of the underlying commodity. The fair values of
fuel derivatives with extendible or cancelable features are based on quotes provided by
counterparties.
Derivative Financial Instruments
The derivative financial instruments set out in this section have been entered into to
achieve PAL’s risk management objectives. PAL’s derivative financial instruments are
accounted for at fair value through profit or loss, except for interest rate swaps and
certain fuel derivatives (which are accounted for as cash flow hedges).
The following table provides information about the PAL’s derivative financial instruments
outstanding as of September 30, 2011 and March 31, 2011 and the related fair values:
Fuel derivatives
Currency forwards
Structured currency derivatives
September 30, 2011
Asset
Liability
P39,857
P369,094
7,446
16,731
–
4,336
P47,303
P390,161
March 31, 2011
Asset
Liability
P130,702
P6,077
17,797
4,211
–
–
P148,499
P10,288
As of September 30, 2011 and March 31, 2011, the positive and negative fair values of
derivative positions that will settle in 12 months or less are classified under “Other
current assets” (P 31,535 in September 30, 2011 and P 148,499 in March 31, 2011) and
“Accrued expenses” (P 365,064 in September 30, 2011 and P 10,288 in March 31,
2011), respectively. The derivative asset (liability) balances include amounts arising from
derivative settlements that are currently due to (due from) PAL which amounted to
(P 3,022) and P 45,058 as of September 30, 2011 and March 31, 2011, respectively.
Fuel derivatives
PAL is dependent on jet fuel to run its operations, and jet fuel costs have become a
larger portion of PAL’s expenses due to the increase in all energy prices over the years.
Approximately 45.68% and 39.58% of its operating expenses represent jet fuel
consumption for September 30, 2011 and March 31, 2011, respectively. In order to
hedge against adverse market condition and to be able to acquire jet fuel at the lowest
possible cost, PAL enters into fuel derivatives. PAL does not purchase or hold any
derivative financial instruments for trading purposes.
PAL’s fuel derivatives not accounted for as cash flow hedges still provide economic
hedges against jet fuel price risk. These derivatives include swaps, collars, and
compound structures with options. These fuel derivatives are carried at fair values in the
consolidated statement of financial position, with fair value changes reported
immediately in the consolidated profit or loss.
Currency forwards
PAL’s currency forwards are carried at fair value in the consolidated statements of
financial position, with the fair value changes being reported immediately in the
consolidated profit or loss. PAL’s outstanding currency forwards consist of short term
buy USD and sell various currencies (i.e., JPY, SGD, CAD). The aggregate notional
amount in USD is equal to $10,068 and $22,636 as of September 30, 2011 and March
31, 2011, respectively. The net fair value of these forwards amounts to (P 9,285) and
P 13,587 as of September 30, 2011 and March 31, 2011, respectively.
Structured currency derivatives
PAL entered into currency derivative options. These contracts are carried at fair value in
the consolidated statement of financial position. The fair value changes of the derivative
instruments are recognized directly in the consolidated statement of comprehensive
income. The outstanding structured currency derivatives are composed of buy USD in
various currencies (i.e., JPY). The net fair value of these options amounts to (P 4,336)
as of September 30, 2011 and nil as of March 31, 2011.
Fair Value Hierarchy
The Group’s quoted available-for-sale financial investments measured at fair value
under the Level 1 hierarchy amounted to P 6,920 in September 30, 2011 and P 6,902 in
March 31, 2011. The Group’s financial assets measured at Level 2, which consist of
derivative assets, amounted to P 47,303 in September 30, 2011 and P 148,499 in March
31, 2011. The Group’s financial liabilities measured at Level 2, which consist of
derivative liability amounted to P 390,161 in September 30, 2011 and P 10,288 in March
31, 2011. There were no transfers between the levels of hierarchies in September 30,
2011 and March 31, 2011.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Results of operations
PAL Holdings’ consolidated total comprehensive loss amounted to P 2,169.4 million for the
six months ended September 30, 2011 a significant downturn of 186% from last year’s
comprehensive income of P 2,513.2 million. The decrease can be attributed to the decrease
in net income by 176%.Total revenues slightly decreased to P 37,594.6 million from P
37,700.9 million in the previous year. There was a decline in passenger and cargo revenues
by 1% and 9% respectively. The drop in passenger revenue is actually the effect of the
peso-dollar rate fluctuations. Had there been no change in the exchange rate, a favorable
effect should have been recognized as a result of the improvement by 11.1% in yields
generated from passenger seat offerings.
Other revenues increased by 15%, this include lease income arising from aircraft operating
lease arrangements with an entity under common control, excess baggage revenues
ancillary revenues generated mainly from other passenger transport services.
Total expenses for the period rose by 14%. This is on account of higher flying operations
which increased by 19%, aircraft and traffic servicing by 4% and reservations and sales by
9%.
Fuel cost which contributed to the increase in flying expense was due to increase in average
jet fuel price per barrel from US$ 97.73 in 2010 to US$ 135.13 in 2011. More international
flights operated led to the increase in aircraft and traffic servicing. While higher selling
expenses recognized related to the transportation service provided the increase in
reservation and sales.
Lower aircraft, component and engine repair costs incurred during the period had the effect
of decreasing maintenance expense by 14 % .
Debt servicing of various long term obligations resulted in lower financing charges or a
reduction of 28%.
While the appreciation of the Philippine peso vis a vis US dollar had the favorable effect of
reducing general and administration account by 8%.
In the current fiscal year, PAL recognized “Other charges” of P 634.1 million versus “ Other
income” of P 930.3 million in the previous year. The unfavorable variance was brought about
mainly by the reduction in unrealized gains resulting from changes in the fair valuation of
outstanding derivative instruments which did not qualify for hedge accounting as well as by
the effect of the income recognized in 2010 from the sale of the Company’s greenbelt
property.
“Other comprehensive loss” account dropped by 92% as there was a change in profile in the
Company’s derivative instruments. There are no fuel derivative instruments designated as
cash flow hedges. All unrealized gains or losses resulting from changes in fair valuation of
the derivative instruments are recognized directly under “other expenses” in the statement of
comprehensive income.
Financial Condition
The Company’s consolidated total assets as of September 30, 2011 amounted to
P 73,888.4 million or 2% higher than the March 31, 2011 balance of P 72,565.4 million. The
increase was brought about by the upward movement in other noncurrent assets by 33%
on account of additional collaterals required under operating lease agreements for certain
aircraft.
The reduction in total current assets by 5% was due to the decrease in cash and cash
equivalents by 30% on account of payments of various debts which led the decrease in the
current portion of long-term obligations by 45%, lower cash earnings generated from
operations, and payments made for various aircraft related acquisitions.
Total liabilities increased by 5% which is mainly due to the increase in Long-term obligations
by 14% as additional loan availments were made for working capital purposes as well as to
finance aircraft and aircraft related acquisitions. The increase in reserves and other
noncurrent liabilities by 77% was the result of the advances received from the Lucio Tan
Group and advance on sale of future US credit card receivables.
As of September 30, 2011 the Company’s stockholders’ equity balance amounted to
P 3,207.6 million or a decrease of 40% from the March 31, 2011 balance of P 5,377.0
million. The decrease was mainly the result of net loss recognized during the period
The Company’s key performance indicators are the following:
1. Total Comprehensive Income (Loss)
The Company’s consolidated total comprehensive loss attributable to parent for the six
months ended September 30, 2011 amounted to P 1,841 million a drop of 186% from
last years’ comprehensive income of P 2,130million.
2. Current Ratio
The Company has a current ratio of 0.37:1 as of September 30, 2011 compared to
0.36:1 as of March 31, 2011.
3. Debt to Equity ratio
Debt to Equity ratio as of September 30, 2011 was 22.04:1 compared to 12.50:1 as of
March 31, 2011
4. Earnings Per Share
The Company reported an earnings (Loss) per share based on net income (loss) of
(P 0.33) as of September 30, 2011 as compared to P 0.44 as of September 30, 2010
and based on total comprehensive income (loss) of (P 0.34) per share as of September
30, 2011 as compared to P 0.39 as of September 30, 2010.
The manner by which the Company calculates the above indicator is as follows:
Current ratio – Current assets/Current liabilities
Debt to equity ratio – Total liabilities/Total Equity
Earnings (Loss) per share – Net income (loss) or total comprehensive income attributable
to holders of parent company over common shares issued and outstanding
PAL’S TOP FIVE KEY PERFORMANCE INDICATORS –QUALITATIVE FACTORS
Mission
Statement
To maintain aircraft with the
highest degree of
airworthiness, reliability and
presentability in the most costeffective manner
To conduct & maintain safe,
reliable, cost & effective flight
operations
To achieve On Time
Performance on all flights
operated
Key Performance Indicator
Aircraft Maintenance Check
Completion
Number of aircraft related
accidents/ incidents
Percentage Deviation from
Industry Standards (OTP
Participation)
Measurement
Methodology
Number of checks
performed less number of
maintenance delay over
number of checks
performed
By occurrence and
monitoring by Flight
Operations Safety Office
Number of flights operated
less number of flights
delayed over total flights
operated
Number of incidents of
safety violation incurred by
cabin crew per month
To provide safe, on time,
Number of safety violations
quality and cost effective
incurred by cabin crew
inflight service or total
passenger satisfaction
To maximize the revenue
Net Revenues generated
Percentage Deviation from
generation in passenger and
from passengers and cargoes Budget/Forecasted
cargo sales through increased carried
Revenues
yields by diversifying market
segments and efficient
management of seat inventory
and cargo space
i. Other than those that have already been disclosed, there are no known trends, demands,
commitments, events or uncertainties that may have a material impact on the Group’s
liquidity.
ii. On July 22, 2008, the Supreme Court rendered an adverse decision in the case entitled
“Flight Attendants and Stewards Association of the Philippines (FASAP) vs. the Philippine
Airlines” ordering PAL to reinstate the retrenched FASAP members and pay back wages
inclusive of allowances and other monetary benefits plus 10% attorney’s fees. PAL filed a
motion for reconsideration. On October 2, 2009, the motion for reconsideration was denied
with finality affirming the earlier decision dated July 22, 2008 with modification in that the
award of attorney’s fees and expenses of litigation is reduced to P 2.0 million. On November
3, 2009, PAL filed a second motion for reconsideration. On September 7, 2011, the
Supreme Court issued a resolution denying with finality PAL’s second motion for
reconsideration. On October 4, 2011, the Supreme Court issued an “En Banc” resolution
recalling the resolution dated September 7, 2011.
On September 9, 2010 FASAP filed a Notice of Strike for alleged Unfair Labor Practice on
the grounds of PAL’s refusal to submit counter proposal and/or conclude the remaining term
of 2005-2010 CBA, address age and gender discrimination , salary increase & rice subsidy.
Attempts by the National Conciliation and Mediation Board (NCMB) to amicably settle the
labor dispute failed. Thus, on October 6, 2010 the DOLE Secretary assumed jurisdiction
over the labor dispute and directed the parties to submit their respective position papers and
other pleadings.
On December 23, 2010, the Department Of Labor & Employment (DOLE) issued a ruling in
favor of FASAP granting salary increase and monthly rice allowance for the period July 16,
2007 to July 15, 2010 and higher compulsory retirement from 45 to 60 years old. On April 1,
2011 DOLE Secretary issued a decision on PAL’s Motion for Partial Reconsideration and
Motion for Clarification. The DOLE Secretary affirmed with modification the December 23,
2010 in that the award of monthly rice allowance for the first year of the CBA effective July
16, 2007 was reduced from P 1,800 to P 1,500. PAL was also directed to reinstate nine (9)
Flight Pursers who were retired at age 55 during the pendency of the case and to pay them
full back wages and benefits. The nine (9) flight pursers who were retired at age fifty-five
(55) were reinstated and those active cabin attendants due for retirement at age 55 were
allowed to continue until age 60 without prejudice to further or other legal action on the
issue. On May 17, 2011 PAL elevated the case to the Court of Appeals via a Petition for
certiorari with prayer for issuance of a Temporary Restraining Order and Preliminary
Mandatory Injunction. To date, the petition is pending resolution before the said court.
In the interim, mediation conferences were called by the DOLE Secretary on the
reinstatement aspect for decision and other undisputed matters. On June 27 , 2011 PAL
agreed to pay the retro and prospective rice allowance starting July 16, 2011; to issue the
guidelines in crediting pregnancy and maternity leave in the length of service of cabin
attendants as well as in the computation of related company benefits and to commence
preliminary talks on the 2010-2015 CBA negotiation on July 2011. On August 23, 2011, PAL
agreed to release the back wages for one year specifically July 16, 2007 to July 15, 2008 at
the end of September 2011. On August 31, 2011 without prejudice to the petition pending
before the Court of Appeals, PAL made the following commitments before the DOLE
Hearing officer: 1.) backwages from July 16, 2008 to July 15, 2009 will be released at the
end of October 2011. 2.) backwages from July 16,2009 to July 15, 2010 will be distributed at
the end of November 2011. On September 21, 2011, FASAP requested for the release of
back wages for the period July 16, 2010 up to the present including the add-on benefits. On
October 3, 2011, PAL manifested during the conciliation conference before the DOLE
Hearing officer to release on or before December 31, 2011 adjustments on the cabin
attendants’ respective salary increases based on the December 23, 2010 decision of DOLE.
In April 2010, PAL released a memorandum informing its employees and the general public
of its plan to spin-off a significant number of employees. Members of the employees’ union
lobbied for reconsideration to the Department of Labor and Employment (DOLE). On June
15, 2010, PAL received a favorable decision from the DOLE confirming the legality of the
spin-off/outsourcing program of its Inflight Catering operations, Airport Services operations
and Call Center Reservation operations. On October 29, 2010, DOLE affirmed its earlier
ruling on PAL’s right to spin-off/outsource its Inflight Catering, Airport Services and Call
Center units. In December, 2010, Malacanang Palace issued an assumption order on the
labor dispute. On August 2011, the Office of the President issued a Resolution denying the
motion for reconsideration of PALEA and reaffirming its March 25, 2011 Decision upholding
the validity of PAL’s spin-off/outsourcing plan. On October 1, 2011, PAL implemented the
spin-off/outsourcing plan and the workers of the outsourced units ceased to be PAL
employees. On October 14, 2011 the company commenced the release of the separation
package of affected workers from the three non core units whose functions were outsourced
to third party service providers.
Currently, there are ongoing investigations being made by the Antitrust Division of the
United States Department of Justice for possible violation of US antitrust laws for both
passenger and cargo services covering the period January 1, 1999 to July 11, 2007 and a
putative class action for possible violation of US antitrust laws brought before the Northern
District of California against air carriers operating passenger air services to and from the
US. Similarly, PAL is also currently being investigated by the Competition Bureau of Canada
for possible violation of Canadian antitrust laws for both passenger and cargo services.
PAL is a plaintiff in various cases pending before the Court of Tax Appeals for the refund of
excise taxes paid under protest in connection with its importation of aviation fuel and
commissary items. The total amount involved in the subject refund cases is P 3,091.9 million
and P 108.2 million respectively. Likewise, there were deficiency Minimum Corporate
Income Tax (MCIT) and Expanded Withholding Tax assessments in the total amount of
P 1,419.5 million covering fiscal years ended March 1998, 2000, and 2005, that were
already decided by the Court of Tax Appeals in favor of PAL, and currently on appeal by the
Bureau of Internal Revenue in the higher courts. Other than this, there are no known events
that will trigger direct or contingent financial obligation that is material to the Group,
including any default or acceleration of an obligation.
Other than this, there are no known events that will trigger direct or contingent financial
obligation that is material to the Group, including any default or acceleration of an obligation.
iii. There are no material off-balance sheet transactions, arrangements, obligations
(including contingent obligations), and other relationships of the Group with unconsolidated
entities or other persons created during the reporting period.
iv. Commitments for capital expenditures
On October 30, 2006, PAL finalized a Purchase Agreement with Boeing wherein PAL placed
a firm order for two Boeing 777-300ER aircraft for delivery in fiscal year 2010 to fiscal year
2011 and purchase rights for two additional aircraft.
In May 2007, PAL finalized a supplemental agreement with Boeing relating to its exercise of
purchase rights for two Boeing 777-300ER aircraft for delivery in fiscal year 2012.
On June 2, 2009, PAL and Boeing agreed to reschedule the deliveries of four Boeing 777300ER aircraft from their original delivery schedules of fiscal year 2010, 2011 and 2012 to
fiscal years 2013 and 2014.
In June 2011, PAL signed operating lease agreements for the lease of two (2) Airbus A320200 aircraft for delivery in March and April 2012. A Letter of Intent was likewise signed in
July 2011 for the lease of additional two(2) Airbus A320-200 for delivery in October and
November 2012.
v. There are no known trends, events or uncertainties that have had or that are reasonably
expected to have a material favorable or unfavorable impact on net sales/revenues/income
from the Group’s continuing operations.
vi. There are no significant elements of income or loss that did not arise from the Company’s
continuing operations.
vii. The causes for any material change from period to period which shall include vertical
and horizontal analyses of any material item:
1. Cash and cash equivalents – H- (30%)
2. Receivables – net H - 14%
3. Expendable parts, fuel, materials and supplies- H- (5%)
4. Available-for-sale investments- H- (5%)
5. Other noncurrent assets – H - 33%
6. Notes payable – H – 7%
7. Current portion of long-term liabilities H- (45%)
8. Accrued expenses– H- 6%
9. Unearned transportation revenue – H- (9%)
10. Long-term obligations- net of current portion- H- 14%
11. Accrued employee benefits- H- 8%
12. Reserves and other noncurrent liabilities- H- 77%
13. Deficit- H- 12%
14. Minority interests- H- (41%)
15. Cargo- H- (9%)
16. Interest income – H- 17%
17. Other revenue – H- 15%
18. Flying Operations – H- 20%; V- 10%
19. Maintenance – H- (14%)
20. Reservation and sales- H- 9%
21. General and administrative – H- (8%)
22. Financing charges – H- (28%)
23. Others-net – H- 168%
24. Net income (loss) – H- (176%) V- (13%)
25. Net changes in fair value of available-for-sale investments – H- (7436%)
26. Net changes in fair value of derivative assets – H- (100%)
27. Effect of foreign exchange translation- H- 103%
28. Comprehensive income (loss) – H- (186%); V- (12%)
All of these material changes were explained in detail in the management’s
discussion and analysis of financial condition and results of operations stated above.
viii. Generally, PAL experiences a peak in holiday travel during the months of January, April,
May, June and December.
SCHEDULE I
PAL HOLDINGS and SUBSIDIARIES
OTHER NONCURRENT ASSETS
(Amounts in Thousand Pesos)
2011
September 30
March 31
Long-term security deposits
3,844,501
3,318,759
Others
1,174,689
451,530
TOTAL
5,019,190
3,770,289
Total assets
73,888,427
72,565,390
3,694,421
3,628,270
5% of total assets
PAL HOLDINGS, INC. AND SUBSIDIARIES
AGING OF ACCOUNTS RECEIVABLE (in PHP)
As of September 30, 2011
(in thousands)
TRADE RECEIVABLES
NON-TRADE RECEIVABLES
TOTAL
Outstanding
Amount
Current
4,926,512
5,743,582
3,773,897
502,112
389,592
467,730
194,949
8,847
46,427
5,037
177,955
31,097
152,946
28,907
190,746
3,739,340
960,512
10,670,094
4,276,009
857,322
203,796
51,464
209,052
181,853
3,930,086
960,512
ALLOWANCE FOR D.A.
4,562,893
RECEIVABLES - NET
6,107,201
Average Collection Period-trade receivables - 30 days
Normal Operating Cycle - 365 days
Over
Over
Over
Over
Over
30 Days 60 Days 90 Days 120 Days 180 Days
Over
1 Year
Items under
Litigation